Mortgage rates fluctuate frequently, so it’s important to check rates regularly, ideally daily until you pull the trigger and apply.
That’s because seemingly small additions to your plan can cost you thousands of dollars over time.
The best way to maximize your chances of getting the lowest rate is to shop around and compare mortgage rates. If you’re considering buying a home or refinancing your current mortgage, here’s how to do it.
How Often Should You Compare Mortgage Rates?
Mortgage rates are constantly changing, changing every day. That’s because many different factors can affect mortgage rates, including the state of the economy, inflation, and the U.S. Treasury. Interest rates have been falling steadily this year, largely due to pandemic-related policies, and are expected to remain historically low for the foreseeable future.
Comparison shopping gives you peace of mind knowing you’ve found the best price for you. At best, comparing your options can give you an opportunity to save when interest rates drop.
When checking rates, you should know that the average mortgage rate may not necessarily qualify you. Your rate depends on your risk profile as a borrower, including your creditworthiness, loan type and term, home location, rate type, down payment amount, and more.
Types of Mortgages
Depending on factors like your credit score, employment history, and debt-to-income ratio, your lender may offer a prime mortgage, a subprime mortgage, or something in between, known as an “Alt-A” mortgage. Here’s a closer look at each:
Lenders view high-quality borrowers as less risky. These borrowers typically have a minimum credit score of 670, according to Experian, though the exact limit varies by lender. 3
People who apply for a prime mortgage also have to make a substantial down payment – usually 10% to 20% – meaning defaults are less likely if you stay vigilant. Because borrowers with high credit scores and debt-to-income ratios tend to take less risk, they get the lowest rates and potentially save tens of thousands of dollars over the life of the loan.
Prime mortgages meet the quality standards set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). These are two government-sponsored companies that provide a secondary market for home mortgages by purchasing loans from the original lender.
Subprime mortgages are offered to borrowers with lower credit ratings and FICO credit scores in the 580 to 669 range, though the exact limits depend on the lender. These loans carry higher interest rates due to the increased risk for the lender.
There are different types of subprime mortgage structures. The most common is an adjustable-rate mortgage (ARM), which initially charges a fixed “trailer rate” and then converts to a variable-rate plus margin loan for the remainder of the loan.
An example of an ARM is a 2/28 loan, a 30-year mortgage with a fixed rate for the first two years before adjustment. While these loans typically start out with a reasonable interest rate, once you switch to a higher variable rate, your mortgage payments can increase significantly.
Alt-A mortgages (aka Alternative A paper mortgages) fall between the prime and subprime categories. A defining characteristic of an Alt-A mortgage is that it is usually a low- or no-documentation loan, meaning that the lender does not require much, if any, documentation to support the borrower’s income, assets, or expenses. 4
This opens the door to fraudulent mortgage lending practices, as both lenders and borrowers can inflate numbers to obtain larger mortgages (meaning more money for the lender and more homes for the borrower).
In fact, after the 2007-08 subprime mortgage crisis, they were dubbed “scam loans” because borrowers and lenders could inflate income and/or assets to qualify borrowers for larger mortgages.
While Alt-A borrowers typically have credit scores of at least 700—well above the limit for subprime loans—these loans typically allow for relatively low down payments, high loan-to-value ratios, and are more secure at the time of the loan. Great flexibility for borrowers with debt-to-income ratios.
These concessions allow some borrowers to buy more homes than they can reasonably afford, increasing the likelihood of default. However, if you do have a decent income but cannot prove it because you earn it sporadically (for example, if you are self-employed), low and no document loans may help.
Because Alt-As are considered somewhat risky (between prime and subprime), interest rates tend to be higher than prime but lower than subprime.
How to Compare Mortgage Rates
Your mortgage rate helps determine your monthly loan payments, as well as your total interest payments over the life of your mortgage. When comparing mortgage rates, ask yourself the following questions:
1. What kind of loan are you eligible for?
Different loan types have different interest rates, so you should make sure to do a like-for-like comparison based on the type of loan you might qualify for. For example, adjustable-rate loans typically have lower starting rates than fixed-rate loans — though that changes after the initial period — and 15-year loans tend to have lower rates than 30-year loans.
2. How much did you put?
The higher the down payment, the better your chances of getting a lower interest rate. Rather than guesswork during the pre-approval process, make sure you know exactly how much you’re investing so you can get an accurate quote from the lender you’re considering.
3. What is a “good” mortgage rate?
Since mortgage rates fluctuate from day to day, it can be difficult to know if the rate you find is the lowest possible rate you can get. Bankrate provides daily benchmark rates for 30-year and 15-year fixed-rate mortgages based on a survey of the largest mortgage lenders in the United States. Depending on the type of loan you get, you can use this information to assess whether an offer is “good” or if there are better options.
However, keep in mind that any actual installment offer you receive is based on your credit score, income, etc. The more you look around, the easier it will be to understand what a good interest rate is for your credit and financial situation.
4. What is APR?
The terms interest rate and APR are often used interchangeably, but they are not the same thing.
Mortgage rates represent the percentage of interest on the loan, while APR represents the percentage of the cost of the loan, including interest, closing costs, and other fees. The APR more accurately reflects your total expenses and is always higher than the interest rate.
Lenders are required by law to include the APR in loan quotes, but they can only include a portion of the cost in the published APR. You can ask the lender which fees are factored into the APR, and use that information when comparing your options.
5. What are the closing costs and fees?
In some cases, the rate the lender gives you includes a mortgage point, which is a fee you pay at closing in exchange for a lower rate. Dealing with multiple lenders can be your lever to beat the competition – but depending on how you calculate it, paying more to get the same or slightly lower rate may not be worth it, so compare these situations carefully.
Some lenders are also flexible when it comes to other closing costs, such as closing fees, or may waive certain fees entirely, such as B. appraisal or application fees. Knowing this information can be helpful when making comparisons.
6. What is your schedule?
Once you find a plan you like, you can block it, usually for 30 to 60 days, but sometimes for as long as 120 days. However, if you’re not planning on getting a mortgage in that time frame, it’s best to keep monitoring interest rates, but perhaps not take the next step of applying for a loan just yet.
7. Have you taken out the tariff?
If you’ve already set a rate, you can still compare mortgage quotes, but lenders usually won’t let you unlock it without paying a fee. If your lock doesn’t have a floating clause, you won’t be able to take advantage of the lower interest rate unless you restart the mortgage process with a new lender. Depending on the difference in tariffs, this may be worth it.
Note that if you work with a mortgage broker, the broker can do some of the work for you, as they will work with multiple lenders to help you find the right rate. However, it’s also a good idea to do your own research so you can compare offers with those offered by your agent.