Obtaining a good mortgage rate when buying or refinancing your house can potentially save you thousands of dollars a year. Interest rates fluctuate daily based on national and worldwide events and economic activity, so timing your purchase or refinance can make a difference in your rate. Improve your chances of getting a competitive rate by shopping around, building a good credit score and locking your rate at the right time.
Good Rates Are Relative
Although there's no arguing when rates are at historic lows, "good rates" are relative. Homeowners and buyers in the 1980s would have been happy to get interest rates offered in the 1990s, while 90's rates pale in comparison to those offered during the 21st Century. Fixed-rate mortgage rates in the 3-percent range were virtually unheard of in the decades prior to 2012, according to average interest-rate data from Freddie Mac. As of the time of publication, the average rate on a 30-year fixed, conforming mortgage was just less than 4 percent, making rates in the 3-percent range "good."
Finding the Best Rates
Locating the best interest rate for your loan involves shopping around between different mortgage programs and lenders. The sheer amount of mortgage loans available and the variety of lending institutions -- both brick-and-mortar and online -- can make shopping for the best rate tricky. Brokers offer a wider range of loan programs and will look for your best deal among various lenders. Online lenders work much the same way. However, banks and credit unions may offer unique, proprietary loan programs that brokers can't access, and with rates that are hard to compete with. Regardless of where you shop, compare interest rates among at least three lenders before choosing one. Also seek quotes for different loan types. For example, adjustable-rate mortgages, or ARMs, tend to have lower starting rates than fixed-rate loans, but tend to be riskier.
Qualifying for the Lowest Rates
Get your financial house in order before you apply for a mortgage. You usually need at least two years' worth of tax returns, recent pay stubs or evidence of self-employment income, such as profit-and-loss statements. You also must provide at least two months' worth of bank statements and asset accounts to indicate the source of your down payment and closing costs. Borrowing funds to cover these costs is usually prohibited, although some programs, such as Federal Housing Administration loans, allow gift funds from family members. Prime borrowers with credit scores between 760 and 850 receive the lowest rates, so it's important to build up a strong credit history**.**
Locking in a Good Rate
A rate-lock ensures you keep an agreed-upon interest rate for a certain amount of time, despite rate fluctuations. Borrowers who find a good rate typically prefer to lock their rates. Most lenders offer loan lock periods of 30, 45, 60 or 90 days. Ask your lender about the cost and time frames for locking an interest rate.
Your rate-lock period should cover the amount of time it takes to close on your mortgage. You must pay extra to extend a rate lock.