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Mortgage rates fell to 2.88% last week – the lowest since mid-February of this year. But if you’re buying a home or looking to refinance, the lowest rates you see are probably not what you will get.
That eye-catching rate of 2.88% is the 30-year average fixed mortgage rate according to Freddie Mac, who publishes weekly average rate benchmarks that experts describe as an industry standard for tracking changes in rates. Individual mortgage lenders also commonly advertise low interest rates on their websites.
But for buyers and refinancers, the industry standard and lender advertisements matter much less than individual circumstances.
That’s not to say average mortgage rates aren’t helpful. They can be a useful benchmark for the rate at which your personal circumstances might qualify you. In other words, someone whose financial situation has not changed dramatically will likely be entitled to a lower rate today than they would have had earlier in the year when the 30-year average rates were 0.30% higher.
But there is so much that goes into your interest rate that it’s effectively impossible to know what your mortgage or refinance rate will be without submitting an application and having a lender review your information.
Even then, until and unless your quote is locked, it could change. “The market has been incredibly volatile, so something you are quoted on Monday may very well not be there on Tuesday,” says Jennifer Beeston, mortgage educator and licensed lender in 46 states.
Despite all the attention average interest rates get, borrowers need to consider more important factors when it comes to locking in the mortgage that’s right for you. What appears to be a good first pass rate could be weighed down by thousands of dollars in additional fees with a real loan.
Here’s what you need to know about what goes into your mortgage rate and how to make sure you get the best deal.
What you need to know to get the best rate
1. Your personal situation matters
Personal factors influence the mortgage or refinance rates you may qualify for. Your credit score and the amount of your down payment greatly influence your rate. But even if you have the exact same credit score and the same down payment as someone else, you won’t both get the same rate. The type of mortgage loan, the type of property, the repayment term, the loan amount, and even where you buy a home can all come into play.
So, until a lender knows all of your relevant financial information and the details of the house you want to buy, you are not looking for an interest rate specific to you.
What buyers can do
Take the time to review your credit reports for inaccuracies and establish your credit score before you apply. There is no quick fix to increasing the credit score used by mortgage lenders, but paying your bills over time and paying off your debt will increase that score. At the same time, building up your cash reserves for a larger down payment or increasing your home equity if you are refinancing will help you get the best possible rate.
2. Prices vary from day to day
Mortgage interest rates are not set by a single entity, but rather are influenced by a wide range of market factors, much like the stock market. Prices vary from day to day and week to week. And when you see specific rates mentioned in the news, it usually refers to a mortgage rate survey such as the Weekly Survey by Freddie Mac.
These types of surveys do not take into account your personal situation and can also be slightly outdated by the time you see them. You can have a higher credit score or put a larger down payment on your home than the minimum borrower standards required for the survey, or vice versa. Thus, the rate survey trends might be more useful than the specific interest rates mentioned.
What buyers can do
Be careful when polled rates are low enough that it makes sense that you are looking for a lower rate than you might have gotten before. But realize that the average rate or a specific advertised rate is probably not the exact rate you will get, and the decision to buy or refinance is far more important than low interest rates.
3. Take the advertised rates with a grain of salt
Advertised rates are never guaranteed. “[Advertised rates] Usually going to be the best possible rates for the best possible candidates with the best possible references, ”says Keith Gumbinger, vice president of mortgage information site HSH.com. That won’t apply to most people, Gubinger says. When you see the rates posted publicly, there is usually some fine print that defines the type of borrower to which those rates might apply, such as someone with a credit score of 740+, a down payment of 20% +, which purchases a single-family primary residence.
“When people see the rates online, often when they call, they don’t get the same rate,” says Beeston. In other cases, you might be able to get that amazing rate advertised in the mail, but there might be a catch. People have to ask “how much am I paying for this fare,” says Beeston. You may get quoted at a low rate, but find that you have to pay thousands of dollars in discount points to get it.
Discount points are optional fees that you can pay to reduce your interest rate. Typically, it costs 1% of your loan amount to reduce your rate by 0.25%. And the exceptionally low fares you find online can have excessive discount points. Even the Freddie Mac survey takes discount points into account in its rate averages.
What buyers can do
Get a quote directly from a lender and always check the fees you’re paying. If you get a rate that you like, lock it in and ask how long the rate lock lasts, which is typically 30-60 days.
How to know exactly what mortgage rate you qualify for
To get a rough estimate of what mortgage or refinance rate you qualify for, you can call a mortgage lender and provide them with some basic information (credit score, income, etc.). But there’s only one way to know for sure what rate you’ll get – submit an application, get a credit check done, and get a rate foreclosure. “The only time you know bulletproof what you’re going to get is when you have that loan estimate in front of you, and it says ‘locked’,” Beeston says. Until you have requested and received a rate foreclosure, it may still change. “If it’s not locked, it’s not real.”
But when shopping for a mortgage, you don’t want to stay focused on the interest rate so much that you end up with a bad deal.
There are significant fees to pay each time you get a mortgage, usually between 3% and 6% of the loan amount. And the lender with the lower rate can charge much higher fees. This is why it is important to shop around and compare the offers of several mortgage lenders. You can do this by comparing the loan estimates that you receive after submitting your applications. The loan quote is a standardized form, so it makes it easy to compare offers between lenders.