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Good deals are still available, and we'll show you where to shop for them

The days of super-cheap mortgages may be over, but it’s still possible to get a good deal if you know where to look.

The average mortgage APR (annual percentage rate) recently topped 5 percent, the highest in a decade. And with the Federal Reserve continuing to push up short-term rates, mortgage rates will only keep rising.

Still, mortgages remain relatively cheap by historic standards. You just need to shop around to find the one that’s right for you.

“Sure, rates are going up, but no matter what the national average might be at any given time, you’re always going to be able to find lower rates,” says Greg McBride, chief financial analyst for Bankrate.com.

Consumers, though, don't always look around for the best deal. 

“Many homebuyers tend to get intimidated by this process and just go with whatever is easiest—usually what their local bank is offering," McBride says. "Smart buyers shop around to uncover the lowest offers.”

For example, the average rate for a 30-year fixed loan was recently 4.85 percent, according to mortgage industry giant Freddie Mac. When we shopped around, we found a 15-year adjustable-rate mortgage (ARM) still priced at the low end of the 4 percent range.

Before you start shopping, however, figure out how much mortgage you can afford. Then follow these steps to find the lowest-priced loan available.

Fixed vs. Adjustable Rate

If you’re planning to stay in your home for at least a decade, a 30-year fixed rate loan—with relatively low monthly payments—is your best bet.

But if you can afford higher payments and want to dispense with the debt sooner, go for a 15-year fixed. It features a lower interest rate and could save you thousands over the life of the loan. 

The average homeowner, however, stays in a home for seven years or less. So you could save plenty by choosing a shorter-term ARM. These mortgages feature lower rates for an introductory period, then a higher rate.

For instance, the interest rate on a 7/1 ARM remains fixed at a low rate for seven years. After the intro period, the rate is adjusted annually based on market rates but with a maximum of 5 percentage points above the original rate.

Because mortgage rates are still low, consider an ARM only if you are absolutely sure you won’t be in the home for more than a couple of years.

“You don't want to be in a position where your mortgage is an ARM and you remain in the home when the loan starts to adjust, because you could be susceptible a large payment increase,” McBride says.
 

Shopping for a Loan

You can shop for a mortgage at several places, including banks, mortgage brokers, online originators like Quicken Loans, and aggregators like Lending Tree. Going to their websites and filling out  preliminary forms should get you interest rate estimates immediately or calls from company representatives who can quickly get quotes for you.

If you want more control (and less email), find a phone number on the lender's website and call directly. We found that you can get pretty accurate estimates over the phone. If you want a quote that could lead to a firm offer, you'll need to give the lender your Social Security number.

Before you start looking at lenders, decide what kind of home you’re interested in and the type of mortgage you want. You’ll also need to tell the lender where you are in the process. Are you just starting to shop for a home, or do you have an accepted offer or a signed contract?

Once you start filling out loan applications, you'll be expected to verify many aspects of your financial and personal life. Ensure that this part of the process proceeds seamlessly by having all of your essential paperwork in hand. Refer to Zillow’s checklist of what’s usually required.

Look at Smaller Players

In addition to looking at the big banks like Chase and Wells Fargo or online lenders like Quicken Loans, research smaller, lower-profile players such as credit unions and community banks.

Search online with the name of your home state and terms like “community bank mortgage,” “s&l mortgage,” and “credit union mortgage.” We found lots of options this way.

Keith Gumbinger, vice president of HSH Associates, a mortgage information website based in Riverdale, N.J., says these smaller lenders typically have better rates for ARMs and offer better terms and rates to people with variable income streams, like the self-employed.

When we searched for “credit union low mortgage rate,” we found the NASA Federal Credit Union, which offered a 30-year fixed-rate mortgage at 4.25 percent. The loan requires a hefty two points (interest paid up front), but even then the APR was well below the national average.

At first glance, the NASA FCU appeared to be only for employees and former employees of NASA. But when we emailed a query about membership, we were told we didn’t need to be members of the credit union to apply for a loan.

Consider a Mortgage Broker

The main advantage of using a mortgage broker is that he or she can shop among many lenders and get better rates than you might on your own. But be aware that brokers get paid by the banks, not you, so check them out carefully.

“If you go the mortgage broker route, get recommendations from friends or colleagues who have had a good experience with a particular mortgage broker in the past,” says McBride.

Mortgage brokers can save you money. For example, on the Quicken Loans website, we found a 30-year fixed rate of 5.125 percent on a $200,000 mortgage for a California borrower with excellent credit who put down 20 percent and paid 1.875 points up front, or $3,750.

If we had gone through a broker who worked with United Wholesale Mortgage, that same loan would have a fixed rate of 4.625 percent with zero points. The only disadvantage is that Quicken offered a 40-day rate lock while UWM's loan offered 30 days.

A great resource for finding a mortgage broker is the aptly named website findamortgagebroker.com.

Take Advantage of Promotions

Banks sometimes hold mortgage sales or promotions. Usually this means the bank lowers the fees it charges, not the interest rate. But even this angle can lead to some savings.

Laurel Road, an online lender, is offering a discount of $650 for applicants who do the entire application online. On a loan of $260,000, that’s equal to a quarter of a percentage point. Ask lenders what specials or discounts are available, and what you have to do to qualify.

Understand the CFPB Loan Estimate

Once you’ve seen some attractive rates from a few lenders, ask each for a Loan Estimate. This is a standard document designed by the CFPB to help you compare mortgages. You can even use it to compare different types of loans, say, a 30-year fixed loan and 10-year ARM.

To get a Loan Estimate, you’ll need to provide documentation of your income and assets, among other items. And you’ll need to supply your Social Security number so the lender can research your credit history.

Get Loan Estimates from as many lenders you can. Multiple inquiries on your credit records will not lower your credit score as long as they all come within a 45-day period and are for the same product—a home mortgage, for instance. They’re all considered one inquiry under these circumstances, the CFPB says, letting you shop around without damaging your credit.

Steve Baughman, a housing specialist at Fair Housing Contact Service, a not-for-profit in Akron, Ohio, that provides HUD housing counseling, suggests you get all the Loan Estimates on the same day, so you can make apples-to-apples comparisons. Page 3 of the Loan Estimate offers three key figures you can compare among lenders: the annual percentage rate, the interest rate and principal accrued after the first five years of the loan, and the “total interest percentage,” that is, the total amount of interest you'll pay over the loan term as a percentage of your loan amount.

Ron Haynie, senior vice president of mortgage finance policy at the Independent Community Bankers of America in Washington, D.C., recommends also focusing on page 1, which shows the amount of cash needed at closing. “That’s what you’ll need bring to the settlement,” he notes. 

 

By Tobie Stanger

October 31, 2018

Consumer Reports