How to Compare Mortgage Rates

How Do You Evaluate a Mortgage?

Before you start assessing mortgage loans, it's important to learn a few basic terms. The more informed you are when you begin your search for a home loan, the better equipped you'll be to make the right decision. Here are some terms you should know:

• Loan term: This is the length of time the lender agrees to give you to pay off your loan balance. Most mortgages offer terms of 10, 15, 20 or 30 years. During this period, you will make monthly payments to the lender to cover the principal and interest (and escrow payments if you have them).
• Principal: The principal is the remaining balance of the loan, not including interest.
• Interest: This is the fee a lender charges on an ongoing basis for a loan they issue. It's noted as a percentage. The annual percentage rate (APR) on the loan includes the interest rate but also factors in other fees. Interest rates are either fixed or variable. You will lock in your rate during the application process.
• Escrow: You may pay into this account, which the lender will use to make payments for property taxes, homeowners insurance and mortgage insurance (if applicable) on your behalf. This is different from an escrow account that is utilized during the homebuying process and holds your earnest money deposit.
• Points: Some lenders sell what are called origination points and discount points. You can buy origination points to reduce the fees you pay to the lender during the loan process, and discount points can help you lower the interest rate on your mortgage. They essentially let you prepay interest in order to reduce your monthly payment.
• Closing costs: These are fees you have to pay when the loan is issued. Costs generally range between 2% and 5% of the home purchase price.

It's tempting to shop based on rates alone, but it's key to consider the quality of the lender you'll be working with. Check online reviews from past and current borrowers. You could also refer to the Better Business Bureau and Consumer Finance Protection Bureau.

A mortgage broker is an option if you're having trouble finding a lender you want to work with. They can shop your information around to lenders in their network to find a loan product with competitive terms. Or you can ask friends and family for recommendations.

How to Compare Mortgage Estimates

The lenders you're considering can provide loan estimates to help you determine who has the best deal. Before you request loan estimates, though, set a budget for how much home you can afford so you can provide realistic figures to the lenders.

Make sure you're comparing loans of the same amount and type, rate type and down payment amount. Doing so will help you compare your options more effectively.

The lenders will likely need the following information to generate loan estimates:

• Your name and Social Security number
• The address and sale price of the home you want to purchase
• Your desired loan amount (or the amount you want to borrow after making the down payment)

When you have the loan estimates in hand, evaluate these factors:

• Loan amount: Is the loan amount within your homebuying budget?
• Monthly payment: What is the monthly principal and interest payment? How much will you pay each month for property taxes, homeowners insurance, mortgage insurance and homeowners association (HOA) dues, if applicable?
• Interest rate: Is the interest rate fixed or variable? What's the worst-case scenario for interest rates if you get an adjustable-rate mortgage (ARM)?
• Rate lock period: When are you able to lock in your rate? Mortgage rates tend to fluctuate, so the timing can make a big difference. Can you purchase points or credits to lower your interest rate?
• Mortgage insurance: Will you be required to pay mortgage insurance in the form of private mortgage insurance (PMI) or a mortgage insurance premium? If so, how much will it cost each month? If it can be removed from the loan, when can that happen?
• Fees and credits: What are the upfront loan costs? Does the lender offer credits?
• Closing costs: How much money will you need to bring to closing?

Be mindful that the amounts listed for escrow accounts, including property taxes and home insurance, may differ. These figures are rough estimates used by the lender to gauge your monthly payment and could change once the loan is approved and cleared to close. Pay attention to factors that can vary by property location, too, such as HOA fees and utility costs.

Why Do Lenders Have Different Mortgage Rates?

Lenders consider market factors and the borrower's finances to set mortgage rates. So, it's not uncommon to receive offers for the same loan amount and term but with different interest rates when shopping around for a home loan.

In fact, before the lender processes your application, they evaluate the bond market, federal funds target rate and current market conditions. They also analyze rates and fees from competitors as well as operational and labor costs to set baseline rates.

When reviewing your loan application, the lender evaluates the information in your credit report, your credit score, your debt-to-income ratio and the size of your down payment. Even if you meet the loan program's general guidelines, some lenders have mortgage overlays that could require you to meet more stringent criteria.

How Much Do Basis Points Matter?

Basis points are equivalent to 1/100th of a percent, or 0.01%. They may seem tiny, but they can have a major impact on your monthly payment and the amount you'll ultimately pay in interest on your mortgage.

To illustrate, let's take a look at a $300,000, 30-year ARM with an interest rate of 3%. Your monthly mortgage payment (principal and interest only) will be $1,264.80. At this interest rate, you'll pay $155,332.36 in interest over the loan term. If market conditions change and the rate increases 12.5 basis points to 3.125%, however, your monthly mortgage payment will climb to $1,285.13, and you'll pay $162,645.59 in interest over the life of the loan.

If you're considering an ARM, use Experian's mortgage calculator to determine how fluctuations in market conditions could affect your monthly payment.

When Should I Start Shopping for a Mortgage?

You should start shopping for a mortgage when your credit is in good shape and you have enough money saved for a down payment. If your credit isn't up to par, you can start making improvements now and working on your overall financial health.

To get a better idea of the loan terms you're likely to be offered, consider getting preapproved. Be mindful, though, that mortgage preapprovals generally only last for up to 90 days. If your income or creditworthiness changes, you could receive a higher interest rate or be denied a home loan when you submit your application.

Save Money by Comparing Mortgage Rates

You can save a bundle on your home loan by comparing rates, but it's equally important to evaluate all terms of a mortgage. When shopping around with lenders, get a loan estimate and review the fine print to find the mortgage product that works best for you.

You can get your free credit report from Experian and read over it in detail. And with an Experian Premium membership, you can view your mortgage-specific credit scores before you formally apply with lenders. This allows you to know where you stand, and if you need to improve your credit score before moving forward.