How to Shop for Mortgage Rates

Shopping for mortgage rates can save you thousands of dollars

Looking to learn how to shop for mortgage rates because you’ve stumbled upon your dream home?

It’s tempting to want to quickly lock in a mortgage rate, especially when the housing market is hot or if you’re keen to refinance. However, rushing could land you a rate that might look small on paper but adds up to a mountain of interest over the life of a 15- or 30-year loan.

Even when it feels like time is of the essence, there’s always time to explore your options. Here’s how you can do that wisely.

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• How to rate shop
• How to get lower rates
• FAQ

How to shop for mortgage rates

Mortgage rate shopping isn’t hard, and it can easily yield thousands of dollars in savings. In fact, research from Freddie Mac shows that borrowers can save $600 over the life of their loan by getting just two extra quotes and $1,200 or more by getting five quotes.

But you have to go about shopping for a mortgage the right way.

There’s more to it than just comparing rates online, and it’s not enough to accept the first offer you receive. You need to be a strategic shopper and find the lowest-rate loan for your financial situation. To understand how to shop for mortgage rates, follow this step-by-step guide.

1. Check your credit score

A strong credit score can be your path to lower mortgage rates. Don’t know your credit score? No worries—you can fetch your free credit reports from AnnualCreditReport.com. This website is your go-to source for credit reports from the big three credit reporting bureaus: Equifax, Experian, and TransUnion.

Once you have your reports, comb through them to check for any errors that might be dragging your FICO score down. If you find inaccuracies, resolve them promptly.

A higher credit score can save you a substantial amount over the period of time you’ll be paying off your mortgage.

2. Compare rates with different types of mortgages

There are a wide range of mortgage options available in the housing market, so it is important to familiarize yourself with them. Broadly speaking, you’ll likely encounter two main types of loans: fixed-rate and adjustable-rate.

1. Fixed-rate mortgages (FRM) come with a fixed-interest rate that won’t change over the life of the loan, offering you predictable monthly payments.
2. Adjustable-rate mortgages (ARMs) offer an initial rate that may be lower but will adjust after a certain period, based on market conditions.

You’ve also got standard mortgage loans and some special options backed by Uncle Sam.

• Conventional loans are backed by Fannie Mae or Freddie Mac and are often favored for their competitive mortgage rates. Unlike government-insured loans, they typically require higher credit scores and larger down payments, but they come with the advantage of more flexible terms and conditions.
• FHA loans are popular among first-time homebuyers because they’re backed by the Federal Housing Administration and offer more flexibility on credit scores and down payments. Keep in mind that you’re on the hook for mortgage insurance premiums for the life of the loan.
• VA loans are designed for those who’ve served in the military, or their spouses. These loans are backed by the Department of Veterans Affairs and usually don’t require a down payment, unless your credit score is on the lower side
• USDA loans help buyers in rural areas and often come without a down payment requirement. However, you’ll need to meet specific income guidelines and make sure the home you’re eyeing is in an eligible location.

Assess your long-term plans to decide which type of loan suits your home purchase needs better.

3. Get pre-approved for a home loan

Think of mortgage pre-approval as a financial background check that serves a dual purpose.

1. It gives you a comprehensive view of the mortgage rates you could qualify for, based on your creditworthiness and financial stability.
2. A pre-approval letter boosts your credibility in the eyes of sellers, making you a more attractive buyer.

You’ll need to fill out a pre-approval application and provide financial documentation, so be prepared for a bit of paperwork. While all mortgage lenders have their own processes, you can typically expect them to provide the following information:

• Personal contact information
• Personal IDs like a driver’s license or Social Security number
• Details about the property you’re purchasing or refinancing
• 2-3 months’ worth of bank statements
• Statements for retirement accounts, investments, and other assets
• W-2 or 1099 forms (for self-employed borrowers)
• Recent pay stubs

Your lender will also run a credit check because your credit history has a big impact on the rate you’re offered. So polish up your credit report and score before you apply, if possible.

Aim to complete all your mortgage pre-approval applications and lender credit checks within a 14-day window to minimize the impact on your credit score. This period is treated as a single inquiry by most credit scoring models, helping to protect your credit rating while you shop for the best rate.

4. Shop for rates with multiple lenders

Start shopping for mortgage rates by reaching out to multiple lenders and requesting preliminary rate quotes. This initial step helps identify who offers lower current mortgage rates compared to others.

Following this, apply for pre-approval with the best mortgage lenders for your situation. They’ll provide you with Loan Estimates, which are detailed documents outlining the specific rates, fees, and terms for each mortgage offer.

As the Consumer Financial Protection Bureau (CFPB) recommends, “Getting a preapproval doesn’t commit you to using that lender for your loan. Wait to decide on a lender until you’ve made an offer on a house and received official Loan Estimates from each of your potential lenders.”

Again, minimize the impact on your credit score by completing this process within a 14-day window.

5. Compare loan estimates

While the mortgage interest rate is important, it’s only part of the picture. To fully gauge the total cost of a home loan, take a closer look at the annual percentage rate (APR). APR captures both the interest rate and other associated fees, such as discount points and origination or underwriting fees.

Lenders are obliged to hand over a Loan Estimate that spells out the loan’s interest rate, APR, monthly payments, and a breakdown of fees—including origination charges and any prepayment penalties—within three business days of your application.

By carefully comparing these estimates, you can identify differences in what lenders offer, identifying those with lower rates but greater fees, and vice versa. This helps you weigh your options and select either a lender that offers lower upfront charges or one that guarantees higher savings throughout the loan’s life.

6. Negotiate with lenders

Did you know that mortgage rates aren’t set in stone? So, don’t shy away from negotiating. Use the rate quotes and loan estimates you’ve gathered from various lenders as leverage. Make it clear to your loan officer that you’re shopping around and willing to go with the best mortgage lender for your situation.

Here’s an example:

• Let’s say Lender A gives you a lower rate, but Lender B has far lower upfront fees.
• There’s nothing to lose by showing Lender A the competing loan offer and asking if they can match or beat it.

Even if the rate cannot be lowered any further, a loan officer may still provide additional discounts or incentives that make the loan worthwhile. You may be able to negotiate a lower origination fee with the lender, resulting in a significant reduction in your closing costs.

Learning how to shop for mortgage rates might feel overwhelming at first, especially if you’re a first-time home buyer. But don’t sweat it; our comprehensive guide on negotiating mortgage rates with lenders will have you negotiating like a pro in no time.

7. Choose a lender and lock your rate

After comparing rates from various lenders and choosing the best fit, it’s time to secure your mortgage rate. A rate lock freezes your interest rate and ensures your monthly payments remain stable throughout the closing process. Rate locking is typically available for up to 30 days at no extra cost, with options to extend.

Remember, while rate locks shield you from rising rates, they also mean you won’t benefit from any drops. However, some lenders offer a rate float-down option, allowing you to adjust to lower interest rates, potentially with a fee, though select programs may offer this benefit without additional costs.

How to get the lowest mortgage rate

Ready to get the lowest mortgage rate? Whether you’re looking to buy a new home or a homeowner refinancing an existing home, these top tips will help you get a lower interest rate!

Don’t accept the first mortgage rate offer you get

Even if you feel that time is of the essence, it’s important to see the rates other mortgage lenders come up with. Interest rates and lender fees significantly impact how much you’ll pay, so it’s really important to make sure you’re getting the best possible deal.

Consider how much interest you’ll end up paying over the course of a 30-year mortgage loan for $300,000:

If you settle for a higher rate in a rush, you’ll kick yourself later when you see better offers. For instance, just a 0.25% higher rate can add an extra $40 to your monthly mortgage payment.

While that might not sound like a lot, it adds up to more than $13,000 over the entire life of the loan. Knowing how to shop for mortgage rates can help you avoid this costly mistake.

Don’t default to your current bank because it’s easy

When figuring out how to shop for mortgage rates, you might be tempted to keep all your financial dealings with your current bank for the sake of convenience. However, if they’re not offering you the best rate or the right loan program for your personal finances, you’re actually better off securing a mortgage from a different lender.

Try big banks, credit unions, online lenders, and even mortgage brokers to help you get the lowest interest rate and best deal.

By all means, see what your bank can do for you. Just don’t think you’re obligated to stick with them for your mortgage. Many banks will sell your loan to a mortgage servicer anyway, so you wouldn’t end up working with them over the life of your home loan.

Consider buying down your interest rate

In real estate, “buying down the rate” means paying a fee upfront to lower your mortgage interest rate.

This fee is typically expressed in “mortgage points,” with one point equating to 1% of your loan amount and potentially reducing your rate by 0.25%.

For example, on a $300,000 loan, buying down your rate by two points would cost $6,000. Those who have extra upfront cash and plan to stay in their home long-term can save a significant amount over the life of the loan, particularly with larger jumbo loans.

Evaluate the savings using a mortgage calculator and consult with your lender during the loan estimation process to determine if this strategy makes financial sense for you.

Increase your credit score and your down payment

Improving your credit score and increasing your down payment will both help you secure lower mortgage rates.

That’s because a higher credit score signals to lenders that you’re a reliable borrower, which can lead to lower rates. You can increase your credit by paying bills on time, reducing debt, especially high-interest credit card debt, and correcting any credit report errors. Also, regularly review your credit report to tackle any issues early.

Additionally, a larger down payment decreases your perceived risk to lenders, potentially resulting in lower interest rates. If possible, save more for your down payment to reduce your loan amount and potentially avoid private mortgage insurance (PMI), which will save you even more money.

Lower your debt-to-income ratio

Getting the lowest mortgage rate often hinges on understanding your debt-to-income (DTI) ratio, which compares your monthly debt payments to your gross monthly income. Lenders prefer low DTIs because they show a borrower can afford to take on a new loan. Whereas high DTIs show that a sizable portion of income is already going toward debt, making it more difficult to borrow more money.

Lenders normally urge you to keep your mortgage payment to less than 28% of your gross monthly income. For example, if you make $6,000 per month, your maximum mortgage payment should be no more than $1,680, which is 28% of your salary.

FAQ: How to shop for mortgage rates

Next steps with your mortgage rate strategy

If you’re figuring out how to shop for mortgage rates, you’re on the right track.

The mortgage or refinance rate you qualify for could make or break your budget, and it might even be the deciding factor in whether you can buy or refinance a home in the first place.

So invest some time in rate-shopping before making any big moves. Begin the process by clicking on the links below.