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5 Ways to Shop for a Low Mortgage Rate

5 Ways to Shop for a Low Mortgage Rate

kiplinger@futurenet.com (Daniel Bortz)

Fri, September 8, 2023 at 7:00 AM EDT·6 min read

Rates are high this year, but you can still find an affordable loan.

Scoring a low mortgage rate is a top priority for many potential homebuyers, as owning a home has become increasingly less attainable. According to the Mortgage Bankers Association (MBA), mortgage applications decreased 2.9% last week from the previous week, declining to their lowest level since December 1996.

“Prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist in a statement.

High mortgage rates are pushing buyers out of the market and leading some others to back out of deals — home purchase cancellation rates stood at around 20% overall in the second quarter, with major homebuilders such as KB Home reporting a cancellation rate of 22%. That’s notable, but still an improvement from the higher nationwide cancellation rate seen just a year earlier, Redfin data found.

Nonetheless, it remains a challenging market for first-time buyers, says Ralph DiBugnara, a senior vice president at Cardinal Financial, a national mortgage lender headquartered in Scottsdale, Ariz.

“I’m seeing some buyers pull out of the market because they can no longer afford a home loan,” DiBugnara says. “I’m also seeing a rise in the number of people who are getting cosigners, and I’m seeing a lot of buyers lowering their price range.”

There’s also a large swath of buyers who are reassessing whether it’s the right time for them to purchase a home. “A lot of buyers have moved onto the sidelines and are taking a wait-and-see approach because of mortgage-rate increases,” says Bill Gassett, a real estate agent with Re/Max in Hopkinton, Mass.

Compare mortgage rates with our tool, in partnership with Bankrate, below.

How to nab a low mortgage rate

If you’re looking to purchase a home in this market, taking these steps can help you score a low mortgage rate.

1. Increase your down payment: To qualify for the lowest rates on a conventional loan backed by Fannie Mae or Freddie Mac — the nation’s two largest mortgage buyers — you’ll need a 20% down payment, says Melissa Cohn, a regional vice president at William Raveis Mortgage, a national lender headquartered in Shelton, Conn. “The bigger your down payment, the better the rate,” Cohn says.

Need a little help piecing together a bigger down payment? DiBugnara recommends looking into national and local down payment assistance programs. You can research eligibility requirements for thousands of down payment assistance programs at DownPaymentResource.com.

2. Raise your credit score: Generally, consumers need a FICO score of 760 or higher to be eligible for the lowest mortgage rates on a conforming loan, says John Ulzheimer, a credit expert and author of The Smart Consumer’s Guide to Good Credit. Raising your credit score by 20 points can potentially save you thousands on your mortgage, as shown in this data from MyFICO.

You may be able to get a free credit score estimate through your bank or credit card issuer, or from a website such as Credit Sesame or Credit Karma — or use MyFICO’s credit score estimator tool. If your credit score needs a boost, there are steps you can take to give it a quick lift. However, your best strategy will depend on why your score is lagging.

“Paying down some of your credit card debts can yield a higher FICO score in as little as two weeks,” says Ulzheimer, pointing out that your credit-utilization ratio — the amount you owe on your credit cards, divided by your card limits — makes up a significant percentage of your FICO score.

A good rule of thumb: Keep your credit-utilization ratio below 30%.

It’s also a good idea to check for errors on your credit report. With identity theft at an all-time high, “make sure all the information on your report actually belongs to you,” says Ulzheimer. “Someone could have opened a credit card in your name and run up a significant amount of debt.”

3. Shop around: Nearly half of consumers get only a single quote when applying for a mortgage, the Consumer Financial Protection Bureau reports. But you’re more likely to find a lower rate if you shop around.

Get quotes from at least three lenders. (Local lenders and credit unions tend to offer lower mortgage rates than big banks. You can also shop at online lenders such as Rocket Mortgage.) Because underwriting requirements can vary, “you may get a different quote from each lender you speak to,” Kushi says.

Borrowers who received two rate quotes during the high interest months of October and November 2022 could have saved $600 annually, according to a 2023 study by Freddie Mac. Borrowers who received at least four rate quotes could have saved more than $1,200 annually, the study showed.

4. Consider an adjustable-rate mortgage: ARMs — short for adjustable-rate mortgages — developed a bad reputation after the housing market crashed in 2008 because so many underqualified borrowers couldn’t keep up with their ARM payment increases. But today’s ARMs have more protections built in than pre-2008 ARMs and can be a good option for some buyers.

An adjustable-rate mortgage starts out at a lower interest rate than you would get with a fixed-rate mortgage. Then, after a specified period of time — usually three, five, seven or 10 years — the rate adjusts based on market indexes, though there are caps on how high interest rates on ARMs can go.

“I like adjustable-rate mortgages when borrowers understand them,” DiBugnara says. “If you have an exit strategy, an ARM can be great product.” For example, if you know that you’re going to sell your home in the next four years, getting a five-year ARM can save you thousands of dollars in interest.

The typical home buyer would save an average of $15,582 over five years — or about $260 per month — by taking out a five-year ARM rather than a 30-year-fixed-rate mortgage, according to a May 2022 Redfin report.

5. Lock In the Best Rate: Qualified for a great interest rate? A mortgage rate lock allows you to lock it in for a set period — typically 30, 45 or 60 days — from the time you receive a conditional loan offer from a lender to when you close on a home.

Many lenders offer a free 60-day rate lock, but you usually have to request it, says Jacob Channel, senior economist at LendingTree. And there are a couple of caveats.

“If something about your financial status, like your income or credit score, changes before you close on a home, your rate can still change,” Channel says. “A lender can also change the terms of your loan if it finds that you’ve failed to disclose something, like additional debts.”

In today’s market, with 30-year mortgage rates fluctuating from week to week, Channel suggests buyers get a “float-down” rate lock. With this kind of lock, you can potentially get a lower rate than you initially locked in if interest rates fall, he says. Lenders often charge a fee of 0.5% to 1% of the total mortgage amount for a float-down lock.

Keep in mind that the future is uncertain. “Nobody — not even financial experts or your lender — knows where rates will end up 30 to 60 days from now,” says Channel. “As a result, there will always be some risk in getting a rate lock.” But, he says, a rate lock can also pay for itself, especially in an environment where rates are rapidly rising.

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