How to find a good mortgage rate
Everyone wants the lowest mortgage rate possible. But what is a good deal? And how do you know you’re getting the best rate available?
The first question is hard to answer, because a ‘good’ rate is different for everyone. It could be 2.75% for one borrower and 3.25% for another on the same day.
But the second question — how to find your best rate — is an easy one.
All you have to do is check with a few different lenders. Their estimates will show you what a good rate looks like for your unique situation.
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What’s a good mortgage rate today?
Mortgage rates change all the time. So a good mortgage rate could look drastically different from one day to the next.
Throughout the first half of 2021, the best mortgage rates have been in the high-2% range. And a ‘good’ mortgage rate has been around 3% to 3.25%.
Of course, these numbers vary a lot from one borrower to the next, as we explain below.
Top-tier borrowers could see mortgage rates in the 2.5-3% range at the same time lower-credit borrowers are seeing rates in the high-3% to 4% range.
In addition, looking forward in 2021, interest rates seem likely to increase. So a good mortgage rate later this year could be substantially higher than what it is today.
Current mortgage rate trends
The mortgage or refinance rate you get depends a lot on your personal finances, and we’ll explain why below. But overall mortgage rates provide the context for your personal rate.
Average mortgage rates have been low for months. This climate has allowed the most qualified borrowers to access historically low rates. But there’s no guarantee rates will remain low in 2022 and beyond.
To see where 30-year mortgage rates may be going, let’s check where they’ve been:
Average mortgage rates by loan type
|August ’21||July ’21||June ’21||May ’21||April ’21||March ’21|
Source: Black Knight Originations Market Monitor Report
Where will rates go from here? No one can predict the future, but most experts — including Freddie Mae and Fannie Mac — anticipate a gradual increase in rates going into 2022.
“Good” mortgage rates look different to everyone
What is a good mortgage rate? That’s a tricky question. Because many of the rates you see advertised are available only to “prime” borrowers: those with high credit scores, few debts, and very stable finances. Not everyone falls into that category.
Of course, you can look at average mortgage rates. But how reliable are those as a guide?
On the day this was written, Freddie Mac’s weekly average rate for a 30-year, fixed-rate mortgage was 2.99%. But the daily equivalent on Mortgage News Daily’s website was 3.13%. So there’s clearly a lot of variance across the market.
How to navigate the world of mortgage rates
The trick is knowing what a good mortgage rate looks like for you. And that will depend on a few different factors, including:
- How strong your finances are — Lenders look at your financial situation, including your credit score, down payment, existing debt burden, and the consistency of your income. A credit score above 720 and a down payment of 20% typically earn you the best rates, but you can qualify for a home loan with far less
- Which mortgage lender you choose — Only by shopping around and getting rate quotes from several lenders can you be sure you’re getting the best possible deal
- What type of mortgage you want — Each type of loan comes with a different average rate: conventional, conforming, FHA, VA, USDA, and jumbo loans. And adjustable-rate mortgages usually have a lower rate lock for the first few years
- Your loan term — The length of your loan makes a difference, too. Shorter–term loans (for instance, a 15–year mortgage) typically have lower interest rates than 30–year loans
- Your loan’s purpose — Rates vary based on your loan purpose; for instance, cash-out refinance loans have higher rates than no-cash-out refinances
Clearly, there are a lot of variables affecting your interest rate. What’s an attractive rate for one borrower may be way too high for another.
And all lenders weigh these factors differently. So making the same application with three different lenders will most likely get you three different rates and sets of fees.
That’s why experts say it’s so important to shop for your rate. There’s no way to know what a good mortgage rate looks like for you until you’ve compared your options.
Credit score and mortgage rates
Your credit score is one of the biggest factors in determining your mortgage rate, especially if you use a conventional loan.
FICO has a tool to estimate mortgage rates based on credit, and it shows how big a difference your score can make when it comes to your interest rate.
Here were FICO’s annual percentage rate (APR) estimates for different credit tiers on Sept. 28, 2021:
|Credit Score Range||30-Yr Mortgage APR*|
*Mortgage rates are based on national averages and estimated by myFICO.com. Your own interest rate will be different
What’s that in dollars?
Say you’re getting a 30–year, fixed-rate mortgage of $300,000 with 5% down.
Someone with the lowest of those APRs (2.642%) would pay around $128,000 in interest over the life of the loan.
But someone whose score is in the 620–639 range would pay closer to $218,900 in total interest payments for the same home price. So over time, what might look like a relatively small rate difference can add up to huge savings.
Other factors besides your credit score
Remember, FICO is looking only at the difference your credit score makes in the chart above.
Lenders will check more than your credit history when you apply for a new mortgage loan. They will also need to know your:
- Debt-to-income ratio (DTI) — This ratio measures how much of your income goes toward existing monthly debts
- Income stability — Homebuyers need to show W-2 forms or pay stubs to prove a steady income. If you’re self-employed, you can provide tax forms or even bank statements
- Down payment — Most loans require a minimum down payment amount (USDA and VA loans are an exception). Putting more than the minimum down could help lower your interest rate
- Home equity for refinancing — Mortgage refinance lenders will check your home equity which, measures how much your home value exceeds your mortgage debt. Having more equity can lower your rate
In short, the better your personal finances look, the lower your mortgage interest rate will be. Taking steps like raising your credit score or savings for a bigger down payment before you buy can help you get the best rates available.
Current mortgage rates can be deceptive
It’s important to understand that ‘shopping around’ means actually applying with multiple lenders and getting personalized quotes. It does not mean simply looking online and picking the lender with the lowest advertised rates.
Why? Because lenders tend to base their advertised rates on ‘ideal’ borrowers. They often include discount points, too, which lower your mortgage interest rate but increase your upfront fees.
So unless you have great credit, a big down payment, and don’t mind paying extra closing costs, you probably won’t get those advertised rates.
The same applies to average rates. By definition, some borrowers will qualify for lower rates and some will get higher ones. What you’ll be offered will depend on your situation and personal finances.
A note on discount points
Here’s an insider tip when comparing mortgage rates: lenders often advertise rates based on the assumption you’re going to buy discount points.
Those discount points are an extra sum you can choose to pay at closing to shave a little off your mortgage rate.
Often, you pay 1% of the loan amount to reduce your interest rate by about 0.25%. So, on a $200,000 loan, you might pay $2,000 to reduce your 3% rate offer to 2.75%.
There’s nothing wrong with these points (provided you have the spare money), and they’re often a good idea. But comparing an advertised rate that assumes you’ll buy discount points with ones that don’t make the same assumption is like comparing apples with oranges. You won’t get a fair answer.
How to find the best mortgage rate for you
Different lenders will look at your financial circumstances in different ways.
For example, a lender that specializes in FHA loans (home loans backed by the Federal Housing Administration) will rarely raise an eyebrow if your credit score is in the 580–620 range. But one that caters to super-prime borrowers likely won’t give you the time of day.
Ideally, you want a mortgage lender that is used to dealing with people who are financially similar to you. And the best way to find your ideal lender is by comparing loan offers.
Here’s how to do that.
Compare Loan Estimates
The only way to find out is to apply to multiple lenders for quotes (officially called Loan Estimates). It doesn’t take long. And the amount you stand to save can easily add up to thousands of dollars.
Don’t worry about your credit score when you compare rates.
Provided you make all your loan applications within a focused period (a month or less), your score should take the same tiny hit for 10 applications as for one. That’s because scoring technologies make allowances for rate shopping for certain types of borrowing, including home loans.
Negotiate with lenders
You’ll get a quote for each loan application you fill out. Nowadays, these all come in the same standard format — the ‘Loan Estimate’ — so they’re easy to compare side by side.
But you don’t have to stop at choosing the lowest quote. You’re always free to ask for better terms.
A good tactic can be to play one lender against another. You may well find you can drive down your rate or closing costs by showing your preferred lender a better offer and asking them to match it.
Look at interest rate and APR
Most borrowers tend to focus on mortgage rates. But the APR you pay on a loan is often just as or even more important than the basic interest rate.
Annual percentage rate (APR) looks at all your costs of borrowing (including interest) and spreads them over the potential life of your loan. So APRs are higher than straight rates. And they can tell you about what you’re actually going to pay.
Just note, APR assumes you’ll keep your loan its full term, which most borrowers don’t. They either sell or refinance before the mortgage term ends.
So look at APR, but remember that it’s not always the last word on what you’ll pay. You can learn more about how to compare interest rates and APR effectively in this article.
Pay attention to mortgage insurance
If your down payment is less than 20% of the purchase price, you’ll typically have to pay private mortgage insurance (PMI). And those premiums can add significantly to your monthly payments.
The cost of mortgage insurance will be reflected in your APR but not in your interest rate. The same goes for the mortgage insurance premiums (MIP) on an FHA loan.
So make sure you learn about the cost and benefits of mortgage insurance before you commit to a loan.
Strategies to get a lower interest rate
Here’s a recap of the best strategies to get a lower interest rate and save on your mortgage loan:
- Choose the type of mortgage that suits your needs best. Your loan officer can help you decide
- Shop around for the best deal. You could make huge savings
- Compare your mortgage Loan Estimates carefully. Pay close attention to the APR and the total you’ll pay in the first five years of your loan
- Negotiate. Don’t be afraid to ask lenders for a better rate or lower fees
- Buy discount points if you can comfortably afford them
And, if you have time before you plan to buy or refinance:
- Boost your credit score before you apply
- Reduce your debts before you apply
- Save a bigger down payment. The higher your down payment, the lower your mortgage rate is likely to be
With those last three, there’s only so much you can do. Few of us could save more at the same time we’re paying down debt.
But prioritize areas where you think you have the most room to grow as a borrower. And just do what you can. Because even a little can sometimes help a lot.
Mortgage rates FAQ
The lowest mortgage rates in 2021 have been in the high 2 percent and low 3 percent range. Your best mortgage rate will depend on your personal credit profile, down payment amount, income, and current debt load. Even your loan term affects your mortgage rate. Shorter term loans tend to offer lower rates.
The Covid-19 pandemic pushed mortgage rates to record lows, which meant the most qualified borrowers were able to get rates even lower than 3.25 percent throughout much of 2021. However, rates are rising, and homeowners who can lock in between 3 and 3.25 percent are still in a great position. In a historical context, 3.25 percent is an ultra-low mortgage rate. It’s a fraction of the rate homebuyers have paid throughout modern history.
Yes, 2.875 percent is an excellent mortgage rate. It’s just a fraction of a percentage point higher than the lowest-ever recorded mortgage rate on a 30-year fixed-rate loan.
2.65 percent is the lowest average mortgage rate ever recorded by Freddie Mac’s Primary Mortgage Market Survey on conventional 30-year fixed-rate mortgages. Rates hit this level in the first week of 2021.
The best APRs closely resemble the best interest rates. APR, or annual percentage rate, includes not only your mortgage interest rate but also additional costs such as discount points and mortgage insurance. If there’s a bigger gap between your APR and your interest rate, you’re paying more in fees.
The answer to this question depends on how long you plan to keep the loan. APR measures your total borrowing costs over the life of the loan, so if you pay off the loan early, you won’t pay the full APR. Page 3 of your Loan Estimate will show the cost of the loan over its first five years. Cmoparing five-year costs is helpful because most homeowners don’t keep a mortgage for its entire term.
Good and bad interest rates depend on your personal financial situation. A bad interest rate for one borrower could be a great rate for another. To get the best rate for someone with your credit profile, be sure to shop around with at least three different lenders. Compare origination fees, processing fees, and underwriting fees as well as rates.
VA loans excel at giving borrowers the most competitive rates. Only veterans, active-duty military members, and some surviving spouses of veterans can qualify. For homebuyers with credit challenges, an FHA loan can often provide the lowest mortgage rate. Someone with a large down payment and excellent credit can usually get the lowest rate from a conventional loan.
A new fee in 2021 — the Adverse Market Refinance Fee — pushed refi rates above home purchase rates. But that fee has since been removed, and homeowners can access very competitive refinance rates in today’s market. If you plan to cash out home equity when you refinance, you’ll have a higher rate than you would for a no-cash-out refinance.
Shop around to find your best interest rate
Mortgage lenders personalize your interest rates based on your credit history and other details about your financial life. So you won’t know for sure what your rate options look like until you apply and get pre-approved.
The first rate you’re quoted may not be your best interest rate. Be sure to apply with several lenders so you can compare Loan Estimates and find your best deal.