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Mortgage rates dropped to 2.88% last week – the lowest they’ve been since mid-February this year. But if you’re buying a home or looking to refinance, the lowest rates you see are not what you’ll likely get.
That attention-grabbing 2.88% rate is the average 30-year fixed mortgage rate according to Freddie Mac, which publishes weekly average rate benchmarks that experts describe as an industry standard for tracking rate movement. 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.
It’s not to say average mortgage rates aren’t useful. They can be a helpful point of reference for what rate your personal circumstances might qualify you for. In other words, someone whose financial situation hasn’t drastically changed will likely qualify for a lower rate today than they would have earlier in the year when average 30-year 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 rate quote is locked, it could change. “The market has been incredibly volatile, so something that you are quoted on Monday very well may not be there on Tuesday,” says Jennifer Beeston, a mortgage educator and lender licensed in 46 states.
For all the attention average interest rates get, there are more important factors for borrowers to consider when it comes to locking in the mortgage that makes sense for you. What looks like a great rate at first pass could be saddled with thousands of dollars in extra fees with an actual loan.
Here’s what you need to know about what goes into your mortgage rate and how to ensure you’re getting the best deal.
What You Should Know About Getting the Best Rate
1. Your personal situation matters
Personal factors influence the mortgage or refinance rates you can qualify for. Your credit score and the size of your down payment heavily influence what your rate will be. But even if you have the exact same credit score and down payment as someone else, you won’t both be quoted the same rate. The type of mortgage, the type of property, the repayment term, the size of the loan, and even where you’re purchasing a home may come into play.
So until a lender knows all of your relevant financial information and the details of the home you want to buy, you’re not looking at an interest rate specific to you.
What buyers can do
Take the time to review your credit reports for inaccuracies and build up your credit score before applying. There is no quick fix to increasing the credit score mortgage lenders use, but paying your bills over time and paying down your debt will increase that score. At the same time, building up your cash reserves for a bigger down payment, or increasing the equity in your home if you’re refinancing, will help you secure the best possible rate.
2. Rates vary from day to day
Mortgage interest rates aren’t set by a single entity but instead are influenced by a wide range of market factors, much like the stock market. Rates fluctuate from day to day and week to week. And when you see specific rates mentioned in the news, it is usually referencing a mortgage rate survey such as the weekly survey that’s done by Freddie Mac.
These types of surveys don’t account for your personal situation, and also could be slightly out of date by the time you’re seeing them. You may have a higher credit score or be putting a bigger down payment down on your house then the minimum borrower standards required for the survey, or vice versa. So the rate survey trends might be more useful than the specific interest rates mentioned.
What buyers can do
Pay attention to when surveyed rates are low enough that it makes sense for you to look into getting a lower rate than you might’ve been able to get before. But realize the rate average or a specific advertised rate isn’t likely to be the exact rate you’ll get, and that lot more goes into the decision to buy or refinance than low interest rates.
3. Take advertised rates with a grain of salt
Advertised rates are never guaranteed. “[Advertised rates] are generally going to be the best possible rates to the best possible candidates with the best possible credentials,” says Keith Gumbinger, vice president of the mortgage information site HSH.com. This won’t apply for most people, Gumbinger says. When you see rates listed publicly, there is usually fine print that lays out the type of borrower those rates could apply to, such as someone with a 740+ credit score, 20%+ down payment, who is purchasing a single-family primary residence.
“When people see rates online, often when they call, they don’t get the same rate,” Beeston says. In other instances, you may be able to secure that amazing rate advertised in the mail, but there may be a catch. People need to ask, “how much am I paying for that rate,” Beeston says. You may be quoted a low rate, but find that you need to pay thousands of dollars in discount points to get it.
Discount points are optional fees 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 rates you find online may have excessive discount points factored in. Even the Freddie Mac survey factors discount points into its rate averages.
What buyers can do
Get a rate quote directly from a lender and always verify what fees you’re paying. If you get a rate you like, lock it and ask how long the rate lock lasts, which is typically 30 to 60 days.
How to Know Exactly What Mortgage Rate You Qualify For
To get a ballpark estimate of the mortgage or refinance rate you are eligible for, you can call a mortgage lender and provide 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, have a credit check performed, and get a rate lock. “The only time you bulletproof know 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’ve requested and received a rate lock, it can still change. “If it’s not locked, it’s not real.”
But when you’re shopping for a mortgage, you don’t want to stay so focused on the interest rate that you end up with a bad deal.
There are sizable fees to pay anytime you get a mortgage, typically anywhere from 3% to 6% of the loan amount. And the lender with the lowest rate may be charging much higher fees. That’s why it’s important to shop around and compare offers from multiple mortgage lenders. You can do this by comparing the Loan Estimates you receive after submitting your applications. The Loan Estimate is a standardized form, so it makes it easy to compare offers between lenders.