How to choose the best mortgage rate

How to choose the best mortgage rate

Many mortgage borrowers associate the “best” mortgage rate with the “lowest” rate. While mortgage professionals know this generally isn’t true, convincing clients isn’t always easy.

While rock-bottom “no-frills” mortgage rates may look great in advertisements – and can indeed save borrowers significant amounts of interest if they avoid renegotiating early – the loss of flexibility after closing can really hurt borrowers.

So what is the real best mortgage rate for home loan borrowers?

According to James Laird, co-founder of Ratehub, and Rob McLister, founder of RateSpy, the lowest available rate is generally not the best rate.

“The ‘best’ mortgage rate means the lowest rate available for a mortgage that contains all of the features and terms the client is looking for,” Laird said.  

He added that some of the key features rate shoppers should consider include:

  • the penalty for breaking the mortgage
  • pre-payment privileges (the lump sum payments and percentage increases to your monthly payments that are permitted annually)
  • whether the loan comes with a home equity line of credit (HELOC)
  • the rate hold period

The lender’s reputation should also be considered when rate shopping. “Does the lender have a reputation for offering good service?” Laird asked. “Even if a mortgage has a feature that a customer wants, they will often need to work with someone from the lender to execute said feature.”

For McLister, the best mortgage rate is one with “the highest probability of maximizing your net worth. That means choosing the optimal combination of interest rate savings, term length, rate type, origination fees, post-closing fees, advice and flexibility.”

As for the key features rate shoppers should take into consideration, McLister said this depends on the individual buyer.  

“A borrower might need to [weigh] factors like payment flexibility, refinance options, porting rules, prepayment allowances, readvanceability, prepayment charges and so on,” he said, but stressed that buyers should never be seduced by the lowest rate. “A less-frills mortgage that makes you pay a higher rate or bigger penalty could easily cost you 3–4 times the interest rate savings.”

“For example, if you move and your closing date is 60 days away, but your lender only allows 30-day ports, you could be stuck paying thousands in prepayment fees and/or lose your pre-existing low rate. Or if you need to refinance but your lender doesn’t let you refinance elsewhere before maturity, you could easily pay 1/2 point more than best market rates.”

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