I’m bombarded by mortgage ads showing some amazing interest rates. And if you’re like me, you’re probably wondering if they are too good to be true.
Well, maybe. Rates are hovering around three-year lows, which is awesome, but there are other things to consider beyond getting the lowest possible mortgage rate:
- Points & Fees
It’s super-easy to compare rates from mortgage lenders online. Just know what you’re looking at. In many cases, you’ll see an offer that looks like this:
| Lender | Rate | APR | MO. PAYMENT | UPFRONT COSTS |
| ABC Mortgage | 3.875% 30-year fixed | 4.069% | $1,129 | $5,654Points: 1.9 |
This is a real live rate estimate from 2/5/2020, based on a $300,000 loan amount with a 20% down-payment, for a Conventional 30-year fixed-rate mortgage.
So, 3.875% is a pretty good rate!
But take a look at that number in the Upfront Costs column: $5,654. See where it says “Points: 1.9” under that?
That is what you’ll have to pay at closing just to get that low rate. That’s nearly 2% of your loan amount and is not part of your down payment.
Bottom line:
Make sure you understand that you may have to pay “points” to get that super-low interest rate. Is it worth it? Maybe. Just be smart and use some free online mortgage calculators to compare options. Bankrate has a good one.
- What’s your credit score?
This rate example we’re looking at is for someone with a credit score of at least 740. If your score is in the 640+ range, your rate is going to be higher.
Bottom line:
Check out your credit report before you start looking. You can get it for free from annualcreditreport.com.
- How can I improve my credit score?
- Pay your bills on-time. Your payment history is the largest factor in your score.
- Pay down high credit card balances. Shoot to get your balances below 30% of your available credit limits.
- Don’t have any credit? Find a community bank or credit union that offers a secured credit card. It’s a card that’s tied to a savings account and lets you borrow only as much as you have saved in the account.
- Check out other mortgage options
The example above is for what lenders call a “conventional” mortgage. That’s one where you are making a down-payment of at least 20% of the home’s purchase price.
But there are other options.
If you’re a first-time homebuyer, you could look at FHA mortgages, which only require a 3.5% down payment.
Some lenders offer conventional loans with as little as 5% down, too, so definitely shop around.
Bottom line:
There’s a ton of mortgage options and lenders out there. Don’t get caught trying to chase the lowest interest rate, because it may cost you more in the long run.
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