Can You Shop Around for Mortgage Rates to Save on Your Home Loan?

A competitive real estate marketplace has kept many would-be homebuyers on the sidelines. Monthly mortgage payments may seem daunting. Payments depend on the loan type, loan term, creditworthiness, and other factors. And most home buyers don’t realize they could save by scoring a lower mortgage rate.

Whether you’re buying or refinancing, different lenders offer varying terms and fees.  The lender you choose will have a lasting impact on your financial situation, but you can only know whether you’re getting a good deal by comparing. That’s why you need to get quotes from more than one lender, compare options, and ask questions. The more you shop, the more information you’ll gain, and the more money you can save.

You may have questions when you start shopping for a mortgage. Knowing the answers to common questions will put you ahead of the game, and they will help you find the best loan and the right lender. Here, The Focus Federal Credit Union provides what you need to know to shop around for mortgage rates and determine the best lending institution for your needs.

Why Shop Around for Mortgage Rates

A mortgage allows you to borrow money to purchase a home, land, or other real estate. You need a mortgage to buy real estate without paying the entire purchase price upfront, which most people can’t do. By taking out a mortgage, you agree to repay the loan, plus interest, over a specified number of years. If you don’t make payments on time, the lender has the right to take the property.

Mortgages come in all shapes and sizes to appeal to many borrowers’ needs. But with so many options, finding the ideal fit for you may feel daunting. The type of loan will impact your down payment, interest rate, mortgage insurance, and the house you can afford. The best option is to find a residence and a mortgage that align with your financial goals.

Common mortgage types are:

• FHA Loans. Federal Housing Administration loans are easier to qualify for and are particularly popular with first-time homebuyers. They require a smaller down payment, and applicants may have lower credit scores. The max loan amount varies by area, and the home must be your primary residence. And unless you make a down payment of 10% or more, you will need to pay mortgage insurance for the term of the loan.
• VA Loans. Eligible veterans, servicemembers, or surviving spouses have loan options for their primary residence through the Department of Veterans Affairs. These government-backed VA loans offer an opportunity with no down payment, less restrictive credit score and income requirements, and no private mortgage insurance payment for those who qualify.
• USDA Loans. USDA loans are government-backed options that require a zero down payment in eligible rural areas. To qualify for a USDA loan, you must meet the Department of Agriculture’s geographic and income eligibility standards.
• Conventional Loans. The federal government doesn’t back conventional mortgage loans. Instead, banks, credit unions, and other financial institutions provide financing. Conventional loans typically offer lower interest rates and more favorable loan terms but have stricter credit requirements. Traditionally, these loans require a 20% or more down payment and a higher credit score.

Rates vary between lenders due to loan products, risk models, and overhead. That’s why it’s worthwhile to shop around for mortgage rates. Rate shopping compares interest rates, fees, and terms from various lenders. Getting multiple quotes may seem a bit overwhelming, but rate shopping can land you lower interest rates, leading to lower monthly payments and long-term savings.

Tips To Improve Your Rate Before You Shop

When determining your mortgage rate, lenders will look at your overall financial health, including your current and past financial situations. Your credit score, payment history, and economic conditions will all affect your payment. In addition, they will review your employment history, income, other debts, loan size and terms, down payment, and loan type. 

Your credit score and credit report are significant factors in the mortgage process. They affect both your application approval and the interest rate you pay.

Because the better the deal you get on your mortgage, the less money you’ll spend repaying the loan, your goal is to secure the lowest mortgage rate possible. The stronger you are as a home loan candidate, the more likely you are to get a better offer from a lender.

Raise Your Credit Score

Your credit score is a three-digit number, typically between 300 and 850, representing your overall credit risk. Generally, higher credit scores indicate a history of responsible credit use, while lower ones suggest a need to improve your financial habits. 

Credit scores are based on payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). 

You can increase your credit score by doing things like paying your bills on time, reducing your debt, avoiding new credit inquiries, and maintaining low credit balances.

Review Your Credit Report

Your credit report provides a snapshot of your credit history, including the type of credit accounts you’ve had in the past and your payment history. 

The three consumer reporting agencies are Equifax, TransUnion, and Experian. Each report includes your payment history and credit accounts. You can check your report with each reporting organization annually at no charge. 

Checking your credit report can help ensure your information is accurate and complete.

Increase Your Down Payment

A down payment is the portion of the home’s purchase price paid up front. The size of your down payment is expressed as a percentage of the home price, rather than a dollar amount. With a higher down payment, you will pay less interest over the life of the loan. 

Lenders calculate interest on the balance of the loan, so by borrowing less, you’ll pay less interest over the life of the loan. And since lenders consider borrowers with larger down payments less risky, you may benefit from a lower interest rate, further reducing your monthly payments.

With a higher down payment, you also avoid paying mortgage insurance. Conventional mortgage borrowers who put down less than 20% are required to pay private mortgage insurance (PMI) monthly. PMI protects the lender if the buyer stops making payments. The average PMI ranges from 0.46% to 1.50% of the original loan amount per year. By putting down more than 20%, you avoid PMI altogether.

Common Mistakes To Avoid

Taking time to shop around for mortgage rates matters, whether you’re buying a new home or refinancing. Still, many people don’t take the extra step.

Shopping around for mortgage rates is one of the easiest ways to save on your home loan. Experts recommend comparing three to five mortgage lenders. You could save thousands of dollars over the life of your loan.

Keep in mind that each inquiry may require a credit check, which can be a hard or a soft inquiry on your credit report. Soft inquiries occur when a rental agency or company pulls your credit report. An employer might run a soft query before hiring you. Hard inquiries occur when a lender or credit card issuer checks your credit to see if you’re a good loan candidate. 

Each mortgage application you submit will result in a hard credit inquiry. A hard query temporarily lowers your credit scores by a few points, but it won’t affect your score long-term. Agencies allow shopping rates for 14 to 45 days without damaging your credit score.

Other common mistakes:

• Not Comparing Interest Rates. When shopping for rates, there are a couple of terms you’ll want to understand: fixed and adjustable rates. With a fixed-rate mortgage, your interest rate won’t change during the loan term, typically 10, 15, 20, or 30 years. The longer the duration of your loan, the lower your monthly payments are, but the more you’ll pay in total interest over the life of the loan. With an adjustable-rate mortgage, also called a variable-rate or floating-rate mortgage, the interest rate is fixed for an initial term, often below the market rate, after which it can change, usually every five years.
• Not Considering a Credit Union. A credit union provides traditional banking services but is owned and operated by its members. They tend to offer better loan rates, more personalized customer service, and lower fees. Other perks of belonging to a credit union include financial education and greater community involvement.
• Not Reviewing the Whole Picture. In addition to rates, you’ll want to account for closing costs and mortgage points. Closing costs are the fees charged to finalize your loan. Lenders generally have flexibility in setting costs. Certain lenders may be willing to negotiate closing costs. Finally, consider mortgage points. Mortgage points, sometimes called “discount points,” are fees you pay to lower your home’s interest rate. Purchasing a point means you’re prepaying the interest to have a smaller monthly payment. Each point you buy costs 1% of the loan amount and reduces the interest rate by 0.25%.
• Loan Shopping After You Find a Home. Shop for a mortgage before looking at a house. Getting pre-approved for a mortgage saves you valuable time by identifying how much you can afford. You can target homes based on your price level. A pre-approval also helps speed up the closing process since much of your financial information is already in the lender’s system. Keep in mind that a pre-approval typically lasts 60-90 days. Plan accordingly.
• Neglecting Home Buyer Programs. You may qualify for local and national first-time home buyer assistance programs, which can help cover all or part of your down payment, closing costs, or special interest rates. For example, the Oklahoma Housing Financing Agency offers eligible borrowers who are teachers, law enforcement officers, firefighters, or state employees reduced mortgage interest rates and down payment assistance equal to 3.5% of the total loan amount.

How The Focus Federal Credit Union Can Help

Set yourself up for success with a little bit of preparation. Whether you’re refinancing or purchasing a new home, it makes smart financial sense to shop around for mortgage rates. 

The Focus Federal Credit Union provides easily accessible rate info and home loan details. Our helpful team can meet with you to discuss your options and competitive rates tailored to Oklahoma buyers. 

Contact TFFCU today to learn more about the loan programs available. 

Aiden Ferguson

Marketing Director

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