Ready to go shopping … for a mortgage? We know: It’s not exactly the kind of fun holiday shopping you had in mind. Still, your ability to sniff out a great mortgage is crucial to your financial well-being as a future homeowner, because the decision you make could stick with you for a very long time, maybe even 30 years. Gulp.
No pressure, right? All we’re trying to say is, it pays to learn how to best compare your options.
Let’s get started, shall we?
Step 1. Shop for a mortgage that fits your needs
Ideally, you should start shopping for a mortgage three to six months before you plan to buy a home. This lengthy lead time is important because you may have to invest time in boosting your credit score. You’ll need 760 or higher to qualify for the best interest rates, says Richard Redmond, mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.” You’ll need a minimum credit score of around 660 to qualify for any mortgage at all.
Step 2. Find low interest rates
As you probably know, one of your main goals while shopping around is to secure a low interest rate. Interest, after all, is basically a service fee charged by lenders. The lower your rate, the less money you’ll pay them back—and every quarter of a percent counts!
On a 30-year $200,000 loan with a 4% interest rate, for instance, you’ll end up paying back not only that $200,000, but an extra $143,739 in interest by the time those 30 years are up. That massive mountain of money will end up higher or lower depending on the interest rate you get.
You can compare interest rates, but keep in mind the rates listed there may not necessarily apply to you. What rates you qualify for depends on your credit score; better (meaning higher) credit scores merit better (meaning lower) interest rates.
But there are exceptions. Some first-time buyers may have access to lower interest rates through the Federal Housing Administration. Loans through the U.S. Department of Veterans Affairs, which are available to active or retired military personnel, enable borrowers to buy homes with lower interest rates than conventional loans as well.
Step 3. Analyze your closing costs
A low interest rate may win you bragging rights, but it’s hardly your only goal. That’s because mortgages come with sizable closing costs totaling an additional 2% to 7% of the sales price of your home. Some of these extra fees are non-negotiable, such as state transfer taxes, but some fees are negotiable, says Katie Miller, vice president of mortgage lending at Navy Federal Credit Union.
As such, aim to meet with three mortgage lenders—which could be banks, credit unions, mortgage brokers, or any combination thereof—and get what’s called a good-faith estimate, which breaks down the mortgage’s terms, including the interest rate and fees.
Also find out from each loan officer what fees are government-regulated and what fees the lender prices—then haggle on the latter, says Sylvia Gutierrez, a loan officer in South Florida and author of “Mortgage Matters: Demystifying the Loan Approval Maze.”
A caveat: When a mortgage lender processes your loan application, it runs a “hard inquiry” on your credit score, which can dock your score by up to 5 points, says Beverly Harzog, a consumer credit expert and author of “The Debt Escape Plan.” Your score will recover over time, but it may take a few months. As a result, you should limit your loan shopping to three lenders.
Step 4. Be mindful of interest rate fluctuations
Once you commit to a particular lender, it will process your loan application and you’ll receive a pre-approval letter, which is a commitment to lend you the money you need to buy a home. Although a pre-approval letter is typically good for 90 days, your interest rate isn’t guaranteed until you sign a purchase agreement with a seller, so you’ll want to keep an eye on changes in the market. However, you can opt to lock in your rate for a period of 30, 45, 60, or even 90 days, depending on your lender.