Mortgage lenders adjust the rates they charge borrowers based on perceptions of risk, borrowers who can demonstrate to the lender they are a low-risk are those most likely to qualify for a rate that matches those seen in all the advertisements or headlines.
The rates quoted by Freddie Mac and others are averages drawn from a variety of financial institutions. Lenders use a varity of approaches to set their mortgage interest rates, for example national banks such Chase Mortgage typically uses markers like Treasury yields and agency mortgage-backed securities issued by Fannie Mae.
Consumers who want to try for the lowest mortgage interest rates available need to consider these basic factors.
CREDIT SCORE The ideal borrower has a FICO score of 740 or higher. That is having a credit score of 740 or higher puts you in the best place for pricing. According to MyFICO.com, borrowers in Ohio with scores of 760 to 850 could qualify for an annual percentage rate of 3.293 percent on a $250,000 30-year fixed-rate mortgage, while those with scores of 660 to 679 qualify for 3.908 percent which translates to a difference in payment of $86 per month.
POINTS The lowest rates usually are decreased by paying a fee called a point, or 1 percent of the loan amount. Borrowers can buy points in to get their interest rate even lower. In Freddie Mac’s weekly survey on mortgage rates, points have averaged 0.7 percent on loans in the last year. Points might make sense depending on your financial situation and how long you expect to stay in a home. Ask for a zero point quote, and a quote with points and compare.
PROPERTY TYPES If you’re buying a duplex or a four-unit building, your rate will almost certainly be higher. Condominiums may also have a rate premium, especially if the community is still in it’s initial phases, or your down payment is below 20 percent. Lenders charge more for non-owner occupied properties, those the borrower is not planning to live in. Commercial properties like apartment buildings have the highest rates, as they are considered riskier.
DOWN PAYMENT Borrowers who put down at least 20 percent are more likely to obtain the lender’s lowest available interest rate. Lenders offer different breaks on rates if equity is higher, so you should ask what’s available. Borrowers can purchase with as little as 3.5% down using an FHA Loan, or 5% down using a conventional loan, and some lenders do still offer zero down programs. The interest rate a lender is willing to offer is inversely correlated to the amount of money a borrower is able to put down and the higher the down payment, the lower the interest rate charged.
LOAN LENGTH Your mortgage interest rate will also depend on how long you plan to live in a home. If you’re likely to move in a few years, an adjustable-rate loan with a low interest rate fixed for, say, three to five years, and adjusted thereafter might be your best option. Some borrowers may not need a 30-year mortgage and rates on 15-year fixed-rate loans are typically over half a percent lower than those on the 30-year.
Borrowers who are serious about finding a home may also consider a mortgage rate lock agreement with a lender.Lenders typically agree not to change an offered interest rate for 60 days, but borrowers confident of a quick closing may be willing to accept a 45-day rate guarantee, or even a 30-day lock, in exchange for a small discount, because the transaction’s speed helps the lender reduce its risk.
Borrowers must make sure, too, that they consider the entire cost of a home, looking carefully at monthly payment calculations including property taxes and homeowner’s insurance.
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