7 Sneaky Low-Rate Mortgage Tricks

June 6, 2018 — 5:17 PM EDT

If you've never bought a home before, when you first start shopping for a mortgage it might seem like the obvious way to choose a lender is to pick the one that offers the lowest mortgage rate. After all, the interest rate on your mortgage will affect both your short-term and long-term financial well-being because it will determine your monthly mortgage payment and the total amount you'll pay for your home.

Little Things Make a Big Difference

Consider this example: Take out a $200,000, 30-year mortgage at 5.5% interest and you'll pay $1,135.58 a month and $408,808.08 (plus your down payment) over the life of the mortgage. Take out that same 30-year mortgage at 4.5% and you're looking at a mortgage payment of $1,013.37 and a total cost of $364,813.42, or a savings of $122.21 a month and $43,995.56 over 30 years. Even small differences in interest rates, like 5.5% versus 5.2%, can make a big difference. In this case, the 5.2% mortgage rate would save you $37.36 a month and $13,449.60 over 30 years. (For details, see How Interest Rates Work on a Mortgage.)

However, taking out a mortgage is a major financial decision, and one that, especially for first-timers, is fraught with potential pitfalls. Just as you consider more than just the sticker price when you shop for a car because factors like safety, fuel economy and reliability are also important, interest rate is only one thing you should consider when shopping for your mortgage. Here are the seven tricks to watch for – even when you think you've already found the lowest interest rate.

1. Teaser Rates  

These attractively low advertised interest rates are often just a way to get you in the door. The truth about mortgage rates is that they change multiple times a day. If you contact a lender based on a rate it has advertised, the odds of your actually getting that rate are slim. (See Got a Good Mortgage Rate? Lock It In!)

2. Low Rates, High Fees  

There are many costs associated with taking out a mortgage besides the interest rate, such as closing costs. Just as the grocery store tries to get you in the door by advertising a gallon of milk for $2 but then wants to charge you $5 for the cereal to pour it on, a bank might advertise a lower interest rate than its competitors but then expect you to pay double the closing costs you might pay elsewhere. Points are another area where lenders can make up for low interest rates by charging borrowers higher fees. (Mortgage Points: What's the Point? has details.)

Information on fees isn't likely to be available up front – the only way to find out about these costs is to talk to a lender and have it prepare a good-faith estimate for you. Make sure you get several estimates so that you can compare the whole cost of the mortgages you are considering.

3. Loan-Term Loaded Dice

Which type of loan you qualify for will affect your interest rate. That great mortgage rate that you see advertised might be for a 15-year fixed conventional mortgage. However, your income and savings might only qualify you for a 30-year fixed FHA mortgage, which will have a higher interest rate and a higher long-term cost. 

4. Location Bait-and-Switch

Where you live also impacts mortgage rates. One of the first questions any lender will ask you is the ZIP code where you plan to purchase property. The national average might be 4.58% on a 30-year fixed. But the average rate for that loan in New York City might be 4.70%, while the average rate in San Francisco might be 4.25%.

5. Tiny Credit Score Window

The best advertised rates only go to borrowers with the best credit scores. The further below 750 your credit score is, the less likely you are to get a rate similar to the advertised rate.

6. 'Lending Institution Reputation' Effect

Just because you've never heard of a particular lending company doesn't mean that it's up to no good. On the other hand, just because the lender is a nationally recognized name doesn't always mean it's a safer choice. Don't be over-impressed by a slick presentation.

Regardless of the company you're considering, do some research to determine how likely you are to get a fair deal when working with it. The lender that advertises the best rates is not always a lender who will give you a fair deal or good service while you're in the process. One database to consult: NMLS (Nationwide Multistate Licensing System) Consumer Access, an online licensing database created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. 

7. Loan Representative Roulette

At least as important as your choice of lending institution is the specific person you work with in that company. Unscrupulous people can work for stellar companies, and people who always put their customers' best interests first can work for shady institutions. This is why the specific person who handles your mortgage for you needs to be someone you trust. Whether this person is competent and ethical in qualifying you for a mortgage, selling you a particular mortgage product, and preparing your mortgage paperwork will have a major impact on your life. Don't just go ahead with someone without checking.

Just ask the people who ended up with mortgages they didn't understand and ultimately couldn't afford and today have foreclosures blemishing their credit reports and are back to renting or even living with relatives to get by. They all probably wish they had looked at more than just the interest rate when they took out their mortgages. (What looks like a good deal often amounts to hidden costs.) 

Before you get too far working with a new mortgage loan officer, excuse yourself from the conversation and research that person. You can use the NMLS database above to check out individuals, as well as companies. If all looks all right, then move forward.

The Bottom Line

Mortgage rates change multiple times a day, and they vary depending on your geographic location, the type of loan you want and your credit score. Perhaps most importantly, they don't tell the whole story about the cost of a loan. A mortgage lender might advertise a great rate, but charge a ton of money in closing costs – or promise a borrower great terms, but then present different numbers in the paperwork at closing when emotions are running high and time is of the essence.

Looking at the whole loan package, not just the interest rate, will help you get the best deal. When you're about to close on a mortgage, ask for the paperwork a few days in advance so that you can make sure it states the rates and terms that you expect. And remember that you have a three-day right to pull out of your mortgage agreement (the right of rescission) if you look at the documents afterwards and decide you shouldn't have signed them.

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