Sunday, February 1, 2015 / by Teresa Dipeso
When you go online to look at mortgage rates, it can be confusing. The only way to get the best rate is to talk to real lenders.
First, decide on which loan program you're going to compare. You need to decide between a fixed, an adjustable rate mortgage (ARM) and a hybrid. A fixed rate is fixed throughout the life of the loan, an ARM has an interest rate that can vary throughout the life of the loan and a hybrid is an ARM that is fixed for a predetermined period then adjusts into an ARM.
In the current rate environment, with interest rates near historical lows, most people select a fixed rate, but that depends on how long you want to stay in the home. If you think you'll sell within five years, go for an adjustable rate. If you believe you'll occupy your home for longer, you'll be better off with a fixed rate loan.
You also need to select a loan term, or its amortization period. The most common fixed rate term is the 30-year fixed-rate mortgage. You can also select a 15, 20, and 25-year term. The shorter the term, the lower the interest rate, but the higher your monthly payments will be.
Some buyers opt for the 30-year term, and pay down their principal when they can. Conventional income-to-debt ratios prevent you from having more than 41% of your gross income used toward debt plus mortgage payments. If you have low debt, or are buying a modest home compared to your means (below an income of 28%), get a shorter term so you can build equity faster.
Now you're ready to compare loan rates. Get referrals for three lenders from family and friends. Give each lender you call the same facts -- what kind of loan you want, the term, how much you want to put down toward the purchase price, and your credit score. This is to get preapproved.
Keep in mind that quotes you receive aren't binding on the lender's part until you actually sign an application and share your personal financial information. Once you put a contract on a home, then you can apply with the lender of your choice. That's when you'll receive your good faith estimate, or binding costs.
Mortgage rates can change throughout the day, so compare lenders' rates a close to the same time as possible. You might get a rate quote from a lender on a Friday morning of 4.5 percent then call another lender the following Monday afternoon and get a quote of 3.75 for the very same loan. That doesn't mean the second lender is lower than the first lender, it means the markets may have changed and rates in general have gone down. You need to call back the first lender and get their updated rate quote.
Give your lenders the opportunity to earn your business, just make sure they're all competing under the same conditions. That's the only way to know you're getting the best rate.