Best Mortgage Rates: 6 Steps to Achieving Bragging Rights

Current mortgage rates are unusually low -- but could yours be even lower? As with most of the financial figures you see reported, news articles discussing mortgage interest rates usually refer to a national average. That means some consumers are doing a little better than that average, and some worse. If you want to secure a better-than-average rate, you can improve your chances with six key steps.

6 Steps to a Better Mortgage Rate

To get a better mortgage rate, it is important not only to go through these six steps, but to do them in order:

  1. Check your credit report. This comes first because if you find any problems with your credit history, it can take time to clear them up. Before you even think about looking at houses, do a little house cleaning on your credit report. Every little improvement could save you money, or even make the difference between getting approved for a mortgage or not. 
  2. Build your down payment. Fannie Mae and Freddie Mac announced upcoming plans for loans with down payments as low as three percent, but there's a catch: low down payment loans require private mortgage insurance (which adds to your rate), and the smaller your down payment, the higher the insurance premiums. In other words, you may not have to come up with a 20 percent down payment, but the closer you can come to that figure, the better your interest rate. Getting an early start on building your down payment puts you in a better position to benefit from low rates when the time comes. 
  3. Choose your loan type. Adjustable or fixed rate? Before you start seriously shopping for a mortgage, get this fundamental decision out of the way so you can focus your search. Recent figures from Freddie Mac show that some adjustable rate mortgages have as much as a 1.5 percent advantage over fixed rate loans. The risk is that these rates can rise over the life of your loan, potentially even pushing your monthly payments beyond your budget. How do you make this choice? Focus on two key factors. First, ARMs are more attractive when rates are high, because at that point rates are more likely to fall. Of course, current mortgage rates are exceptionally low, so this would argue against an ARM at this time. However, the second factor is the length of time you plan to have the loan -- the introductory rate for a 5/1 ARM is fixed for 60 months, so if you plan to sell or refinance in a few years, this ARM could make sense.
  4. Pick your time frame. Once you have picked a mortgage type, turn your attention to your term. If you are looking for a fixed rate mortgage, the most common choices are a 30-year or a 15-year mortgage. A shorter loan term gets you a lower interest rate, but you need to be sure the higher monthly payments will fit your budget. With an adjustable rate loan, the major time frame issue is how soon and how often you want the rates to reset. Earlier and more frequent resets earn you a lower initial rate, but expose you to more risk of rising rates. 
  5. Follow the news. Look at mortgage news and commentary for a few days, and you'll see what rates are doing on average, and if they're trending up or down. This will help you judge the offers you see from specific lenders and know if they are higher or lower than average. Of course, the actual rate you get will depend on your profile.
  6. Get competing quotes. Now that you know what average rates are, get specific mortgage quotes from several competing lenders. These quotes should be more important to your decision than any advertised rate, because they will be customized for your situation.

Current mortgage rates are among the lowest ever, but why not try to do even better? Since the results could keep saving you money for the next 15 to 30 years, and give you bragging rights at your next cocktail party, the time it takes to go through these steps can more than pay off.

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