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How to Get the Best Mortgage Rates

Shop Around

Gather quotes from more than one lender so you can educate yourself about what's available.

Compare Apples to Apples

Obtain quotes from different lenders for the exact same set of loan circumstances. This must be done on the same day, due to day-to-day interest rate fluctuations.

Compare rates and closing costs for the same loan program. Different loan programs carry different rates.

Compare loans for the same "rate lock" time period. When your loan is locked, it means the rate you are quoted at time of lock-in will in fact be the rate (and fees) that you get, as long as your loan closes within a specified time period. Most lenders will only lock your rate and fees once your loan is approved, so you will be subject to the possibility of rates moving up while your loan application is being processed. The longer the lock period required to close your loan, the more costly your loan will be.

Most loans are locked for 30 days, but some larger lenders who process enormous volumes of loans prefer to lock for 60 or 90 days, giving them more time to close your loan.

It may be necessary to compare a 60 day rate lock from a large bank to a 30 day rate lock from a mortgage banker or mortgage broker in order to make a fair comparison, because the big bank simply may be slower to close your loan.

Compare APRs, With Caution

Suppose two different lenders offer you quotes for the same loan program on the same day, for the same borrowing circumstances. To determine which loan is cheaper, you can start by comparing mortgage APRs (Annual Percentage Rate) that are required to accompany each quote. (If you are not provided with an APR, insist upon it. It is required by law.)

Mortgage APR comparison can be deceiving. The APR is meant to provide a standardized way of adjusting the stated interest rate for a loan according to any loan fees associated with the loan. The more the loan fees, then, in effect, the less you are borrowing. Loan fees are like pre-paid interest. Whenever there are loan fees, the APR will be higher than the stated interest rate.

The APR can be a helpful measure of loan costs, but it has limitations. It is best to compare APRs only for like mortgage programs, such as one 30 year fixed rate loan to another 30 year fixed rate loan. Factors that can cause the APR to give a false picture of true loan cost include whether the interest rate is variable and how long you expect to keep the loan before selling or refinancing.

With adjustable rate mortgages (ARMs), APRs can be misleading. With an ARM loan, once any initial teaser rate expires, the loan may adjust to the future value of a third party index, plus a margin on top of that. APR calculations for ARMs assume that the future value of the index will remain at today's level. It is quite possible that this assumption will turn out to be wrong, so APRs should be interpreted with caution when they are presented with quotes for adjustable rate mortgages.

Compare Loan Fees for the Same Interest Rate

The most accurate way to compare two loan programs is to start off with a pair of quotes for the exact same loan program, the same interest rate, on the same day, for the same borrowing circumstances, and for the same rate lock period.

Then, compare the total loan fees. The total loan fees should include any lender-related charges, such as points, origination fees, processing fees, underwriting fees, administration fees and anything else that goes to the mortgage broker and/or lender.

You should exclude any fees for third-party services, like credit reports, appraisal fees, title insurance and escrow fees. Those items will usually be very nearly the same regardless of which mortgage provider you choose.

Following this procedure, the loan with the lowest total loan fees is the cheapest loan.

Some Challenges To Overcome When Mortgage Comparison Shopping

Lenders do not always make it easy to comparison shop for a mortgage. They may provide quotes with confusing terminology for loan fees. Look for the fees that show up on lines 800-818 of the industry-standard Good Faith Estimate of Closing Costs. These are the lines that contain all fees charged by the lender. All other fees are paid to third parties and will be roughly equivalent regardless of the selected lender.

Lenders may calculate APRs differently. Federal law requires that APRs be calculated according to a standardized procedure, but some lenders may bend those rules when issuing quotes. That's another reason to not rely entirely on APRs when comparing loan quotes between lenders.

Some lenders may bait and switch. Watch out for lenders that quote low rates then insist that rates and fees are higher when they have you committed. Once you've gone through the loan process you may feel like it's too late to avoid being gouged because the lender has processed your loan application.

To avoid getting boxed in like this, look for a lender that will guarantee a reasonable markup over cost, and will make this guarantee up-front, before you are committed. That's the way we do it at LRG Mortgage. Our customers know that when it's time to lock and close their loan, LRG will be providing a true current wholesale market rate plus a guaranteed fixed retail markup.