If you’re thinking about buying a house, you probably know that you should shop around to find a loan with a competitive interest rate. When you visit lenders’ websites, you will see mortgage interest rates advertised, but you might not be offered the same rates if you apply for loans from those lenders.
Advertised Rates are Based on Assumptions
Many factors can influence a mortgage interest rate. The rates that lenders advertise are based on a series of assumptions, including loan amount, loan term, loan-to-value ratio and credit score. Advertised rates are for single-family homes, but rates are higher for borrowers who purchase vacation homes and investment properties.
When you look at advertised rates, check the fine print to find the assumptions underlying those figures. If they differ significantly from your situation, you will not get the advertised rate.
Compare the assumptions that different lenders use and their advertised rates. If several lenders make similar assumptions, but their rates differ significantly, you can figure out which lender would be most likely to offer you a good rate, even if it was higher than the advertised rate.
Interest Rate and APR
It’s important to understand the difference between the interest rate and the annual percentage rate (APR). The APR includes the interest rate for a mortgage, plus closing costs and other fees.
The fees included in the APR are optional and lenders decide which fees to include. They generally don’t provide a breakdown of the fees included in their APRs until after a customer has applied for a mortgage. You may have to request mortgage quotes from several lenders to get detailed information so you can make a meaningful comparison.
How to Qualify for a Lower Interest Rate
You may be able to take some steps to qualify for a competitive interest rate. Pay all your bills on time. Focus on paying down credit card balances and other debts to boost your credit score and lower your debt-to-income ratio.
Don’t open new accounts before you apply for a mortgage and don’t close old accounts, even if you don’t use them. Doing so could shorten the average age of your accounts. It would also reduce your total available credit, which could increase your credit utilization ratio and hurt your credit score.
Making a larger down payment could reduce your loan-to-value ratio and help you qualify for a better interest rate. You may qualify for a down payment assistance program.
You could pay extra money at closing to purchase mortgage discount points and enjoy a lower interest rate over the life of the loan. One discount point equals 1 percent of the mortgage amount.
Get the Best Rate You Can
Apply for loans from multiple lenders. When you receive the loan estimates, look carefully at the terms and the fees included in each so you can compare apples to apples.