It’s smart to shop around for mortgage lenders, but your first question shouldn’t be “what’s the interest rate?”
Interest rates aren’t the first or best point to focus on for three reasons:
Interest rates can vary based on your specific qualifications. A quote needs to be tailored to you. Information about you (credit score, income, loan size, down payment amount) and the property you’re buying (location, property type) impacts the interest rate you qualify for. It’s best to have a lender fully verify this information so they can provide a personalized, realistic quote.
There are a variety of different loan programs available. Interest rates can vary according to these programs. For example, the interest rate on an adjustable rate mortgage is often lower than on a 30 year fixed mortgage, and the interest rate on a jumbo loan can differ from a conforming loan. It’s best to know what loan program you’re interested in before looking at rates.
Lenders can offer you virtually any interest rate. Even taking into account that rates vary based on qualifications and loan programs, a lender can offer you virtually any interest rate. What you need to consider is how much you would have to pay up front for that particular interest rate. Typically, the higher interest rate you choose, the less you will pay up front and vice versa. This is where points (AKA “discount points”) come into play, which we’ll explain more below.
Consider total closing costs
When comparing quotes, the total closing costs for your loan are just as important as the interest rate.
Here are the main factors to consider:
Points (AKA “discount points”). Points are essentially a one-time closing cost that you pay in exchange for a lower interest rate. This means you’ll pay less over the life of the loan and more up front. If you aren’t planning on keeping your mortgage for a long period of time, you shouldn’t be paying points as you may never break even when looking at up front costs vs. monthly savings. The average life of a mortgage is about 5 to 6 years, so for most people it makes sense to pay as little as possible at closing.
Lender credits. Some lenders will offer the opposite of points, known as “lender credits,” for taking a higher interest rate. They’ll give you a credit to offset your closing costs in exchange for your taking a higher interest rate, so you pay less up front and more over the life of the loan.
Lender-specific costs. Lenders can charge different fees for services such as underwriting, processing, appraisal, credit reports, and mortgage insurance. It’s important to find out what each lender’s fees are as you compare quotes.
How do you find out all of this information?
When you start to shop for your mortgage, ask for a full written quote or an official loan estimate that gives you the full picture based on your specific needs.
Make sure you’ve supplied your the lender all of your pertinent information so you know you’re getting a personalized quote with all of the relevant interest rate, payment, and closing cost information to help you make the most informed decision possible.
Gathering all the details and asking all your questions to be sure you understand more than the interest rate for your mortgage is something you’ll be glad you did when it comes time to finalize your loan and start making those monthly payments. You’ll know exactly what you’re paying for and why.
Want to learn more or get started on a loan?