If you don’t think mortgage interest rates particularly matter, consider that a 30-year, $250,000 at 3.75% costs $1,157.79/month, but the same loan at 7.5% interest costs $1,748.04/month. That’s the difference between a profitable investment with a strong cash flow, and a negative cash flow. Whether you are buying your first rental property or refinancing your current loan, here are five tips to help secure the best interest rate.
Tip #1: Be a Diligent Shopper
Just because a lender has the best rate doesn’t mean it’s the best loan for you.
Loan officers are salesmen, and are paid on a commission. They will quote you the highest rate and fees that they think they can get away with, without losing your business. So shop around, leverage different rate and fee quotes against each other, threaten to go elsewhere, negotiate and generally be a savvy shopper.
Also remember that even small differences in interest rates add up to substantial sums over the course of a 30-year loan – the difference between the total interest for a 5% and a 6% interest mortgage for $250,000 is over $56,000 in interest payments to the bank.
Remember - when it comes to your mortgage, you won't get what you deserve, you'll get what you negotiate, so be prepared to push hard for better loan terms, and if you haven't talked to at least three lending companies, you haven't talked to enough.
Tip #2: Know What Fees You Are Paying
Your interest is not the only cost of taking out a home loan, and generally speaking you can opt to pay higher fees for a lower interest rate. Fees vary from the type of loan you have to the amount of the loan to who the lender is and in some cases, the state your property is in.
Below is a (far from exhaustive) list of fees that sometimes affect interest rates:
Application Fee: Any bank is going to add this fee on to your statement. It covers the processing of your request for the loan and for investigating your FICO score. The average cost for application fees is $350.
Loan Origination Fee: This is the sales fee charged by the mortgage broker (or lender, if there is no broker), and this is one of the places the loan officer’s commission comes from. This fee is almost always negotiable, and often is charged in “points” - one point is equal to one percent of the loan amount. If you took out a $600,000 loan, one point would be $6,000.
Private Mortgage Insurance (PMI): If you are making a down payment on your home that is less than 20% of the amount of the loan, a lender will often require you to buy mortgage insurance. This insurance will cover the bank’s loss if you fail to pay your mortgage, and the bank takes a loss when they foreclose on the property. In most cases this takes the form of higher monthly payments for the first few years of your loan, but in some cases borrowers may be able to secure a lower-interest loan by choosing a loan that includes an up-front mortgage insurance fee (an example includes FHA-insured loans).
Continue to Part II: Credit, Down Payments & Financial History