How To Get The Best Mortgage Rate
August 30, 2021
Finding the best mortgage rate is a vital component of your home buying journey. It’s important to educate yourself about the various options available in the market, especially if you are buying a home for the first time.
To help you on your journey, we have created a blog post with pro tips on how to get the best mortgage rate along with the various factors that play a role in getting the best mortgage. First, let’s get to know the different types of mortgages.
Types of Mortgages
Based on factors like credit score, debt-to-income ratio, and employment history, different lenders may offer different types of mortgage options to the borrower. Mentioned below are the three most common types of mortgages offered by the lenders:
1. Prime Mortgage
Prime mortgages are for people with a credit score of 670 or more (the cutoff may vary from one lender to another). Since they have a good credit score, prime borrowers are considered less risky by lenders.
Prime mortgages are often offered at a lower interest rate, with the borrowers generally having to make 10-20% of the down payment. The good thing about prime mortgages is that they meet the quality standards set by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association.
Mortgages meeting quality standards give borrowers the protection against paying excessive fees and points. At the same time, they protect lenders against any legal actions claiming that they failed to verify the borrower’s repaying abilities.
2. Sub Prime Mortgage
Individuals with credit scores falling in the range of 580-669 are generally offered a subprime mortgage. However, like prime mortgages, the exact cut-off varies from one lender to another.
Adjustable-rate mortgages, mortgages with interest rates that vary over time, are the most common example of subprime mortgages.
3. Alt-A Mortgages
Alt-A Mortgages are also known as Alternative A-Paper mortgages. These are typically low document loans and don’t require much documentation to prove a borrower’s assets, income, or expenses.
Alt-A mortgages allow low down payments and greater flexibility in the debt-to-income ratio of the borrower.
Since they are easy to obtain and require less paperwork, borrowers can exaggerate their income to qualify for the mortgage. This increases the risk of fraudulent practices. In fact, Alt-A mortgages became commonly known as ‘Liar loans’ because of that exact reason during the infamous mortgage crisis of 2007-08.
Considering the risks involved in these types of mortgages, the interest is also generally higher than those of prime mortgages.
How to get a mortgage
One of the easiest ways to secure a mortgage is to work with a mortgage broker.
What is a mortgage broker?
A mortgage broker is an intermediary who brings together a mortgage lender and a mortgage buyer. A mortgage broker can play a crucial role in your home buying process, as they help you in securing a mortgage, carrying out all the documentation process for underwriting, approval, and more.
The main responsibilities of the mortgage broker are…
- Gathers financial information from the borrower such as income, assets, employment, credit report, and so on.
- Assess a borrower’s ability to secure a mortgage based on the information gathered
- Gathers and provides information about various lending options available for the borrower
Although, these are not the sole responsibilities of a mortgage broker. Mortgage brokers can also help you in determining…
- an appropriate loan amount based on your financial circumstance
- loan to volume ratio
- ideal loan type
In simpler words, you can think of a mortgage broker as a middle-man working between the lender and the borrower saving both the parties a lot of time, effort, and resources by doing all of the important work for a fixed commission.
A mortgage broker might help you secure a mortgage, but they are not obligated to get you the best mortgage.
The question that arises here is – how do you get the best mortgage rate?
1. Shop Around
Just because one lender is offering you an Alt-A or a subprime mortgage doesn’t mean that you are not qualified for a prime mortgage.
Always shop around various lenders or lending institutions to check for options. Considering the competitive nature of this market, there will always be other options as long as you look for them. After all, a slight decrease in the rate of interest in your mortgage might save you thousands of dollars.
Take this for an example:
Suppose you choose to take a $200,000 loan for 30 years. One lender is offering you the option of a subprime mortgage at an interest rate of 6%. The monthly payment in this case comes out to be $1199 per month.
At the same time, another lender is offering you a prime mortgage at a 4.6% rate of interest. So, the monthly payment would be $1025.
This means that you will be saving $174 per month, and if we calculate it in total for the entire duration the difference comes out to be $62,573.
2. Use a mortgage calculator
In the above example, the monthly payment is calculated with the help of a mortgage calculator.
A mortgage calculator provides you an estimate of the monthly payments based on the information you supplement. This generally includes:
- The estimated price of the home that you are looking to buy
- The loan term
- Applicable interest rate
- The amount of the down payment you can make
You can try different scenarios in a mortgage calculator and figure out the most optimal mortgage for you. For instance, making a larger down payment or reducing the mortgage term from 30 to 20 years.
Check out our blog post that gives you tips on bringing your mortgage rate down to learn more.
The Bottom Line
Changing your thought process from ‘how to get a mortgage’ to ‘how to get the best mortgage’ could save you tens of thousands of dollars in the future.
While a broker might seem to offer great help as mentioned earlier, they are not obligated to give you the best options. So, don’t trust them blindly. Do your own research, look for various options, gather as much information as you can, and then make a calculated decision.
All the best!