How to Shop for Mortgage Rates | 2024 Guide

Shopping for mortgage rates can save you thousands of dollars

Looking to learn how to shop for mortgage rates because you’ve stumbled upon your dream home?

It’s tempting to lock in a mortgage rate quickly, especially when the housing market is hot or if you’re keen to refinance. However, rushing could land a rate that might look good on paper but adds up to a mountain of interest over the life of a 15- or 30-year loan.

Even when it feels like time is of the essence, you can (and should) always explore your options. Here’s how you can do that wisely.

In this article (Skip to...)

• How to shop for mortgage rates
• Helpful tips
• Factors influencing rates
• FAQ

How to shop for mortgage rates

Shopping for mortgage rates isn’t hard, and it can easily yield thousands of dollars in savings. In fact, research from Freddie Mac shows that borrowers can save $600 over the life of their loan by getting just two extra quotes and $1,200 or more by getting five quotes.

But you have to go about shopping for mortgage rates the right way.

There’s more to it than just comparing rates online, and it’s not enough to accept the first offer you receive. You need to be a strategic shopper and find the lowest-rate loan for your financial situation. To understand how to shop for mortgage rates, follow this step-by-step guide.

1. Shop for rates with multiple lenders

Start shopping for mortgage rates by reaching out to multiple lenders and requesting preliminary rate quotes. This initial step helps identify who offers lower current mortgage rates compared to others.

Following this, apply for pre-approval with the best mortgage lenders for your situation. They’ll provide you with Loan Estimates, which are detailed documents outlining the specific rates, fees, and terms for each mortgage offer.

As the Consumer Financial Protection Bureau (CFPB) recommends, “Getting a preapproval doesn’t commit you to using that lender for your loan. Wait to decide on a lender until you’ve made an offer on a house and received official Loan Estimates from each of your potential lenders.”

Again, minimize the impact on your credit score by completing this process within a 14-day window.

2. Get pre-approved for a home loan

Think of mortgage pre-approval as a financial background check that serves a dual purpose.

1. It gives you a comprehensive view of the mortgage rates you could qualify for, based on your creditworthiness and financial stability.
2. A pre-approval letter boosts your credibility in the eyes of sellers, making you a more attractive buyer.

A pre-approval is also an essential step when shopping for mortgage rates, as it provides clarity on where you stand. To start, you’ll fill out a pre-approval application and provide financial documentation, so be prepared for a bit of paperwork.

3. Understand different loan types

There are a wide range of mortgage options available in the housing market, so it is important to familiarize yourself with them when shopping for mortgage rates. Broadly speaking, you’ll likely encounter two main types of loans: fixed-rate and adjustable-rate.

1. Fixed-rate mortgages (FRM) come with a fixed-interest rate that won’t change over the life of the loan, offering you predictable monthly payments. Common options include 30-year fixed-rate mortgages and 15-year mortgages.
2. Adjustable-rate mortgages (ARMs) have interest rates that adjust periodically based on an index or benchmark rate plus a margin. ARMs typically start with a lower interest rate for an initial period (e.g., 5, 7, or 10 years) before transitioning to adjustable rates.

You’ve also got standard mortgage loans and some special options backed by Uncle Sam.

• Conventional loans are backed by Fannie Mae or Freddie Mac and are often favored for their competitive mortgage rates. Unlike government-insured loans, they typically require higher credit scores and larger down payments, but they come with the advantage of more flexible terms and conditions.
• FHA loans are popular among first-time home buyers because they’re backed by the Federal Housing Administration and offer more flexibility on credit scores and down payments. Keep in mind that you’re on the hook for mortgage insurance premiums for the life of the loan.
• VA loans are designed for those who’ve served in the military, or their spouses. These loans are backed by the Department of Veterans Affairs and usually don’t require a down payment, unless your credit score is on the lower side
• USDA loans help buyers in rural areas and often come without a down payment requirement. However, you’ll need to meet specific income guidelines and make sure the home you’re eyeing is in an eligible location.

Assess your long-term plans to decide which type of loan suits your home purchase needs better, whether you’re buying a primary residence or a single-family home for investment purposes.

4. Analyze loan estimates

Once you have pre-approval, you will receive Loan Estimates. You’ll need to analyze them thoroughly to make an informed decision on how to shop for mortgage rates.

• Loan Terms: Look at the loan amount, interest rate, and whether it’s fixed or adjustable.
• Projected Payments: Review estimated monthly payments, including principal, interest, taxes, and mortgage insurance.
• Closing Costs: Examine all associated fees to understand the total cost of securing the mortgage.

Compare both the interest rate and the APR (annual percentage rate), which includes the interest rate plus other costs. This comprehensive view helps you understand the overall cost of the loan.

5. Understand APR vs interest rate

When shopping for mortgage rates, it’s crucial to differentiate between the interest rate and the annual percentage rate (APR):

• Interest Rate: This is the cost of borrowing the principal loan amount, expressed as a percentage. It directly influences your monthly payment and the total interest paid over the life of the loan.
• APR: The APR includes not only the interest rate but also other costs associated with the loan, such as mortgage insurance, closing costs, discount points, and loan origination fees. Because of this, the APR is typically higher than the interest rate and offers a more comprehensive view of the loan’s total cost.

When comparing mortgage offers, consider both the interest rate and the APR to gain a complete understanding of the loan’s overall expenses. This comparison will help you assess which mortgage is truly the most cost-effective option for your financial situation.

6. Compare points, fees, and total loan costs

When shopping for the best mortgage rates, consider how these factors affect the total cost over the life of the loan. A slightly higher rate with lower fees might be more beneficial in some cases, especially if you don’t plan to stay in the home for a long time.

• Discount points: These are upfront fees paid to lower the interest rate.
• Origination fees: Charges for processing the mortgage application.
• Closing costs: Additional expenses such as appraisal fees, title insurance, and other lender fees.

Remember, the best mortgage lenders will provide clear, detailed loan estimates that allow for easy comparison when shopping for mortgage rates. Don’t hesitate to ask questions and negotiate terms to secure the most favorable mortgage for your situation. Also, inquire about mortgage rate lock options to secure your rate once you’ve found a suitable offer.

7. Negotiate with lenders

Did you know that mortgage rates aren’t set in stone? So, when shopping for mortgage rates, don’t shy away from negotiating. Use the rate quotes and loan estimates you’ve gathered from various lenders as leverage. Make it clear to your loan officer that you’re shopping around for best mortgage rates and willing to go with the best offer for your situation.

Here’s an example:

• Let’s say Lender A gives you a lower rate, but Lender B has far lower upfront fees.
• There’s nothing to lose by showing Lender A the competing loan offer and asking if they can match or beat it.

Even if the rate cannot be lowered any further, a loan officer may still provide additional discounts or incentives that make the loan worthwhile. You may be able to negotiate a lower origination fee with the lender, resulting in a significant reduction in your closing costs.

8. Choose a lender and lock your rate

After comparing rates from various lenders and choosing the best fit, it’s time to secure your mortgage rate. A rate lock freezes your interest rate and ensures your monthly payments remain stable throughout the closing process. Rate locking is typically available for up to 30 days at no extra cost, with options to extend.

Remember, while rate locks shield you from rising rates, they also mean you won’t benefit from any rate drops. However, some lenders offer a rate float-down option, allowing you to adjust to lower interest rates, potentially with a fee, though select programs may offer this benefit without additional costs. When shopping for mortgage rates, remember to consider how to shop around for mortgage rates effectively to find the best deal.

Helpful tips when shopping for mortgage rates

Ready to get the lowest mortgage rate? Whether you’re looking to buy a new home or a homeowner refinancing an existing home, these top tips will guide you on how to shop for the best mortgage rates and help you achieve a lower interest rate.

Don’t accept the first mortgage rate offer you get

Even if you feel that time is of the essence, it’s important to shop for mortgage rates with various lenders. Interest rates and lender fees significantly impact how much you’ll pay, so it’s really important to make sure you’re getting the best possible deal.

Consider how much interest you’ll end up paying over the course of a 30-year mortgage loan for $300,000:

If you settle for a higher rate in a rush, you’ll kick yourself later when you see better offers. For instance, just a 0.25% higher rate can add an extra $40 to your monthly mortgage payment.

While that might not sound like a lot, it adds up to more than $13,000 over the entire life of the loan. Knowing how to shop for mortgage rates can help you avoid this costly mistake.

Don’t default to your current bank because it’s easy

When figuring out how to shop for mortgage rates, you might be tempted to keep all your financial dealings with your current bank for the sake of convenience. However, if they’re not offering you the best rate or the right loan program for your personal finances, you’re actually better off securing a mortgage from a different lender.

Try big banks, credit unions, online lenders, and even mortgage brokers to help you get the lowest interest rate and best deal.

By all means, see what your bank can do for you. When shopping for mortgage rates, don’t think you’re obligated to stick with them for your mortgage. Many banks will sell your loan to a mortgage servicer anyway, so you wouldn’t end up working with them over the life of your home loan.

Consider buying down your interest rate

In real estate, “buying down the rate” means paying a fee upfront to lower your mortgage interest rate.

This fee is typically expressed in “mortgage points,” with one point equating to 1% of your loan amount and potentially reducing your rate by 0.25%.

Example: Witn a $300,000 loan, buying down your rate by two points would cost $6,000. Those who have extra upfront cash and plan to stay in their home long-term can save a significant amount over the life of the loan, particularly with larger jumbo loans.

When shopping for mortgage rates, evaluate the savings using a mortgage calculator and consult with your lender during the loan estimation process to determine if this strategy makes financial sense for you.

Increase your credit score and your down payment

Improving your credit score and increasing your down payment will both help you secure lower mortgage rates.

That’s because a higher credit score signals to lenders that you’re a reliable borrower, which can lead to lower rates. You can increase your credit by paying bills on time, reducing debt, especially high-interest credit card debt, and correcting any credit report errors. Also, regularly review your credit report to tackle any issues early.

Additionally, a larger down payment decreases your perceived risk to lenders, potentially resulting in lower interest rates. If possible, save more for your down payment to reduce your loan amount and potentially avoid private mortgage insurance (PMI), which will save you even more money.

Lower your debt-to-income ratio

Getting the lowest mortgage rate often hinges on understanding your debt-to-income (DTI) ratio, which compares your monthly debt payments to your gross monthly income. Lenders prefer low DTIs because they show a borrower can afford to take on a new loan. This is especially important when shopping for mortgage rates, as a lower DTI can improve your chances of securing the best deal. Conversely, high DTIs indicate that a significant portion of your income is already going toward debt, making it more challenging when shopping around for mortgage rates and qualifying for additional borrowing.

Lenders normally urge you to keep your mortgage payment to less than 28% of your gross monthly income. For example, if you make $6,000 per month, your maximum mortgage payment should be no more than $1,680, which is 28% of your salary.

Factors influencing mortgage rates

Mortgage rates are the interest rates charged on a home loan. They represent the cost of borrowing money to purchase a property and play a fundamental role in determining your monthly mortgage payment.

When you shop mortgage rates for your home mortgage, it’s important to understand the factors that influence them.

Economic indicators

Economic indicators, such as inflation, employment rates, Federal Reserve policies, and market conditions, significantly influence mortgage rates. Higher inflation usually leads to higher rates as lenders reduce their risk. Conversely, a sluggish economy may result in lower rates to stimulate borrowing and investment.

It’s important to be aware of these factors as you shop around for mortgage rates, as they can impact when rates drop.

Personal financial profile

Your personal finances, including your credit score, income, debt levels, and overall financial health, significantly affect the mortgage rate you are offered. A higher credit score often leads to lower mortgage rates because it indicates to lenders that you are a less risky borrower.

Additionally, a lower debt-to-income ratio and a stable, verifiable income can also help secure a more favorable mortgage rate.

Where to shop for mortgage rates

Figuring out how to shop for mortgage rates effectively involves researching various lenders, comparing different loan terms, and considering multiple lending options.

1. Online comparison tools

Online lenders and comparison websites offer a convenient way to shop and compare current mortgage rates from multiple mortgage lenders simultaneously. This is often considered the best way to shop for mortgage rates due to its efficiency.

2. Banks and credit unions

Traditional banks and credit unions often provide competitive rates, especially for existing customers. Credit unions, in particular, often provide favorable terms to their members. Visiting a local bank or credit union can also provide a more personalized experience, and loan officers can offer advice tailored to your financial situation.

3. Direct lenders

Direct lenders, such as online mortgage companies and specialized mortgage lenders, offer loans directly to consumers without intermediaries. They can often provide streamlined loan application processes and quick approvals.

4. Mortgage brokers

Mortgage brokers act as intermediaries between borrowers and lenders. They can access a wide range of loan options, which might be particularly helpful for first-time home buyers or those with complex financial situations. However, be aware that brokers typically charge a fee for their services, either upfront or as a percentage of the loan amount.

FAQ: How to shop for mortgage rates

Begin shopping for mortgage rates today

If you’re figuring out how to shop for mortgage rates, you’re on the right track.

The mortgage or refinance rate you qualify for could make or break your budget, and it might even be the deciding factor in whether you can buy or refinance a home in the first place.

So invest some time in rate-shopping before making any big moves. Begin the process by clicking on the links below.