One of the most important things to do when shopping for a mortgage loan is to lock in your rate when mortgage rates are at their lowest. This can help you secure a more favorable outcome for your mortgage rate. But first, what exactly is a mortgage rate?
A mortgage rate is the interest rate applied to a home loan. These rates are influenced by the price of mortgage-backed securities, which are bonds backed by U.S. mortgages.
There can be significant differences in interest rates depending on the type of loan you choose—whether it’s a conventional loan, VA, FHA, USDA, or jumbo loan. Rates also vary between mortgage lenders.
As part of your pre-borrowing phase, it’s important to understand the factors that impact mortgage rates and what you can do to maximize your investment and minimize costs when shopping for a mortgage.
Check for Mistakes on Your Credit Report
Your credit score plays a crucial role in securing a great mortgage rate. The higher your score, the easier it will be to qualify for a lower rate. Applicants with excellent credit can often obtain a mortgage rate that’s a full percentage point or more lower than those with average credit. A difference of just one percentage point can reduce your monthly mortgage payment by 10% or more.
Your Target: Low Rate and Low Costs
Mortgage rates fluctuate constantly and can be hard to predict. Your goal when shopping for a mortgage is to secure the lowest possible rate. Being a savvy mortgage shopper requires some background knowledge.
It’s not just about finding the lowest mortgage rate—you also need to consider the closing costs.
Lenders often quote rates with the fees included, so it’s important to pay attention when comparing loan offers. Some lenders may advertise a low rate, but make up for it by inflating closing costs. Be vigilant and ask plenty of questions.
When shopping for a loan, focus on one aspect at a time. If you’re aiming for a specific rate, ask the lender to offer the lowest possible closing costs at that rate. Then, compare offers from different lenders to find the best combination of rate and closing costs.
Alternatively, you can focus on the lowest closing costs you’re comfortable with and ask the lender what the interest rate would be based on those costs.
Use our mortgage calculator to determine your monthly payment, ensuring the home you’re considering is a smart financial investment.
Lock In Your Rate
Once you’ve chosen a lender and are satisfied with your interest rate and closing costs, it’s time to lock in your rate.
A “rate lock” ensures that your lender will maintain your mortgage rate for a set period, protecting you from potential rate increases.
Mortgage Rates and Refinancing a Home
When refinancing a home, mortgage rates play an even more significant role compared to buying a new home. The benefit of refinancing depends largely on the difference between your current mortgage rate and market rates. The rate differential must be large enough to offset the costs of refinancing. (Use our refinancing calculator to determine if refinancing makes sense for you.)
As Forbes explains, “The mortgage rate really matters because a one-percentage-point difference in mortgage rates translates into at least a 10% difference in the monthly mortgage payment. For example: on a standard 30-year fixed-rate mortgage, the monthly payment on a $200,000 loan would be $955 for a 4% mortgage versus $1074 for a 5% mortgage. That’s a monthly difference of $119.”