When I looked for my first mortgage, I was skeptical about rates that were too low. There had to be a catch when one mortgage had a rate that was a full percentage point less than another. It turns out there is a catch. Fees can differ by thousands of dollars.
That's why Texas Mortgage and Lending Commissioner Doug Foster recommends that home loan shoppers compare annual percentage rates instead of just the rate you see for the mortgage by itself. This rule applies to primary residences and investment properties alike.
The reason is the annual percentage rate accounts for the fees you're paying to secure the mortgage. This way you can figure out the real price difference between a mortgage with a low interest rate and high fees and a high interest rate and low fees.
So, the real question is: How do you find the lowest rate? Here are four sure-fire ways to find out.
Step 1. Learn How to Check Your Credit Score
Rates are often broken down by credit score groupings. Mortgage shoppers with excellent credit will usually get a better rate than someone with fair credit. You need to know what you have to offer in terms of credit risk.
You can get a free estimate of your FICO score at MyFICO.com and get free access to your credit report without the score at AnnualCreditReport.com.
If you notice an error on your credit report, challenge it. A simple comment that removes a misreported item on your credit report can bump you up a credit category, potentially saving you thousands on your mortgage rate.
[Recommended: How to Build Your Credit Fast on $30k a Year or Less]
Step 2. Shop Around to Find the Market's Best Mortgage Rates
It doesn't matter whether you find rates from your local bank, the newspaper or online. The issue that causes the most problems for consumers is only talking to one lender, Foster says: 'Whether they go to the Internet or newspaper (or to the BankRate comparison tool below this article), they absolutely need to talk to more than lender.' That gets consumers the best rate, and if they don't like an answer one lender gives, they can ask another company to explain it.
When lenders know they have competition to get your business, you may also be able to get price-matching deals or offers to roll your closing costs and fees into the mortgage.
Step 3. Balance Closing Costs with the Lowest Mortgage Rate
Getting the best rate on your mortgage is one part of the equation, but you'll also need to consider how much in closing costs you may need to pay up front for the mortgage. For instance, one lender may offer you a 5% rate on a mortgage loan, but you may have to pay $6,000 in closing costs. Another lender may offer you $1,000 in fees with a 6% rate.
Which lender should you go with? Short answer: the mortgage with the lower APR will likely save you more money in the long run. So even if you have only $1,500 in cash available to pay fees, don't abandon the 5% loan yet as the lender may be able to roll the fees into the cost of the mortgage.
Simply put, the best way to find a great deal on a mortgage is compare, compare, compare. When you've settled on a lender, read the document in its entirety and ask any remaining questions. If anything doesn't look right to you and the lender doesn't answer your questions properly, you may want to go with your second choice. Communication with a company you could have a relationship with for the next 15 or 30 years can be as important as the mortgage rate you get.
