Are you potentially missing out on saving thousands of dollars on your upcoming mortgage? A recent study by LendingTree revealed that a surprising 54% of homebuyers settle for their first mortgage offer without exploring other options. However, the benefits of shopping around for a mortgage are evident: 45% of borrowers who compare offers end up with a better deal. We want to ensure you make the most of your financial opportunities. This guide is designed to assist you in navigating the mortgage market, offering valuable advice on negotiating with lenders to secure the most advantageous and cost-effective home loan in 2025.
Understanding Mortgage Loan Types
When selecting a mortgage, you will need to make two crucial decisions: determining the loan program that aligns with your requirements and deciding whether a fixed-rate or adjustable-rate mortgage suits your circumstances best.
Types of Mortgage Rates
Before delving into specific loan programs, it’s essential to distinguish between fixed and adjustable rates, as this choice can have a significant impact on your long-term expenses.
Fixed-Rate Mortgages
– Interest rate and monthly payments remain constant
– Available in 15- or 30-year terms
– Minimal risk with no payment fluctuations
– Ideal for individuals seeking long-term payment stability, such as homeowners and retirees
Adjustable-Rate Mortgages (ARMs)
– Initial lower rate for a specified period (3, 5, 7, or 10 years)
– Interest rate adjusts periodically after the initial phase concludes
– Monthly payments may rise or fall based on market rates
– Suitable for short-term homeowners or those anticipating rate decreases
đŸ’¡ How It Works: Adjustable Rates vs. Fixed Rates
For a $400,000 loan, opting for a 5/1 ARM at 6.30% instead of a 7% fixed rate could result in monthly savings of $514 during the introductory period – $2,476 versus $2,990. However, when the initial phase ends in five years, your payment might increase to $2,958 if rates surge to 8.3% – representing a $482 monthly rise.
Popular Loan Programs
While conventional mortgages are a preferred financing option for home purchases, various loan types exist that could feature lower down payment requirements, higher borrowing limits, or other benefits tailored to your individual circumstances.
Traditional Mortgages
Conventional Loans
– Down payments starting from 3%
– Lower fees compared to government alternatives
– No mortgage insurance necessary with a 20% down payment
– Requirements: Credit score of 620+, stable income
– Suitable for borrowers with good credit and consistent income
Jumbo Loans
– For loans exceeding $806,500
– Slightly higher rates than conventional loans
– Elevated down payment requisites
– Requirements: Credit score of 700+, 10% to 20% down payment, significant cash reserves
– Geared towards high-value homebuyers with robust finances
Low down payment requirement of just 3%
Ideal for low- to moderate-income buyers
FHA 203(k) loan
Single loan that covers purchase and renovation costs
Includes structural repairs and contractor bids
Requires project plans and additional paperwork
Buyers interested in fixing up homes
Portfolio loans available
Flexible requirements for financing unique properties
Custom terms possible, varies by lender
Some lenders may require higher down payments
Strong financial profile needed
Suitable for borrowers who don’t meet traditional requirements, such as self-employed individuals, real estate investors, or foreign nationals
đŸ’¡Expert tip: Homeowners aged 62 and older can consider a reverse mortgage to access home equity without monthly payments, but there are risks involved. Learn more about reverse mortgages in our guide to see if it’s the right option for you.
How to shop for a mortgage: A step-by-step guide
While many homebuyers stick with the first lender they find, shopping around can save you thousands over the life of your loan. Follow these steps to find the right mortgage for you:
1. Calculate your budget
Consider property taxes, insurance, maintenance, and potential HOA fees
Keep total housing costs below 28% of your gross monthly income
2. Know your credit score
Order free credit reports from all three major bureaus annually
Review reports for errors and report any inaccuracies
Maintain a stable financial picture until your mortgage closing
đŸ’¡Expert tip: Avoid making changes to your finances, such as applying for new credit cards or moving money between accounts, to prevent questions from your lender before closing.
3. Research and contact lenders
Types of lenders to consider:
– Traditional banks for in-person service, but higher rates
– Online lenders for competitive rates and fast processing
– Credit unions with special member programs
– Mortgage brokers with access to multiple lenders for best rates
Brian Shahwan, VP Mortgage Banker and Broker at William Raveis Mortgage, advises:
Ask lenders about their available financing options and the number of lenders they work with
Initial consultations are free and won’t impact your credit score
Consider both banks and brokers for different benefits and assistance programs
By following these steps and consulting with various lenders, you can find the most suitable mortgage for your needs.
1. Consult with a broker and a couple of other lenders to explore a wide range of loan options and secure the best deal available.
2. Obtain multiple quotes and conduct a thorough comparison.
When reaching out to at least three lenders for loan estimates, pay attention to the Annual Percentage Rate (APR) of each loan, not just the interest rate. The APR factors in the yearly borrowing cost, including interest rate, fees, and other expenses associated with the loan. This provides a more accurate basis for comparing rates across different lenders.
Additionally, inquire about float-down options, special programs, and benefits offered by each lender when requesting rate quotes.
3. Apply for your mortgage.
Once you have selected a lender, proceed by submitting your formal mortgage application along with the required documentation. The lender will then process your information, initiate an appraisal, and commence the underwriting process. Be prepared to provide documents such as tax returns, proof of income, bank statements, mortgage details, and identification. It is advisable to consult with your financial advisor regarding the tax implications and withdrawal timing if you plan to use retirement accounts for your down payment.
4. Finalize the deal.
As you approach the closing stage and prepare to take possession of your new home, thoroughly review your total monthly housing costs. Mortgage-related home sales can be completed within eight weeks of accepting an offer. The closing procedure generally takes place at the office of your mortgage lender, title company, or attorney. Allocate sufficient time for closing, typically two to three hours, and consider scheduling the closing in the morning to address any unforeseen queries. Ensure to bring necessary items to the closing, including photo ID, cashier’s check for closing costs, proof of insurance, and a checkbook for additional expenses. It is recommended to have a financial advisor or real estate lawyer review your documents prior to signing to ensure clarity on terms and discover any potential issues.
A 5.8% interest rate may initially seem appealing, but when factoring in fees and charges, the APR could rise to 6.1%. For comparison, the national average APR for a 30-year fixed mortgage is currently at 7.01%, while the 15-year fixed mortgage APR averages 6.35%, according to a February 2025 Bankrate survey of major mortgage lenders.
Shahwan suggests considering factors beyond just the interest rate when evaluating mortgage options. It’s important to inquire about additional costs like closing fees and potential benefits such as free float downs. While interest rates are subject to market fluctuations, other terms and advantages remain constant.
Furthermore, understanding the impact of a 1% change in mortgage rates is crucial. Points and rate buy-down options can influence your interest rate: points are upfront fees that can lower your rate by 0.25% per point, typically costing 1% of the loan amount. Assess market conditions when deciding whether to buy points, as trends may affect the value of this investment.
Monthly mortgage payments consist of principal, interest, taxes, insurance, and potentially HOA fees. Ensure these expenses align with your budget, considering that taxes, insurance, and HOA fees may increase over time.
Private Mortgage Insurance (PMI) is an insurance that safeguards lenders in case of loan default, often required for conventional mortgages with less than a 20% down payment. You can request PMI removal once you’ve attained 20% equity in your home.
Closing costs, typically ranging from 2% to 5% of the loan amount, cover various fees like origination fees and title insurance. Inquire about float-down options and special programs when exploring mortgage offers to secure the best deal.
Negotiating with lenders can be advantageous; leverage competitive offers, as rates, fees, and terms are negotiable. Stay informed, present alternative offers, and time your rate lock strategically to enhance your negotiating position and secure favorable mortgage terms.
In the market, Shahwan advises against waiting for the perfect rate. Instead, he suggests a two-part strategy: Utilize free float-down options to secure a lower rate if markets improve before closing, and lock in when you notice a favorable dip. It’s also recommended to negotiate beyond just the rate. While interest rates are crucial, lenders are often willing to negotiate other costs such as origination fees, closing costs, loan application fees, rate lock periods, underwriting and processing fees, and appraisal fee waivers. For more tips on securing the lowest rate on your next mortgage, delve deeper into our homebuying series.
To find a good mortgage broker, consider doing a Google search, asking friends, family, and local real estate agents for recommendations. If purchasing a condo or co-op, consult your agent on banks that have recently transacted in that building for potential benefits or specific programs.
Having a cosigner on your mortgage can help you qualify for lower rates and better terms, given their joint responsibility for the loan. However, remember that lenders generally consider the lowest credit score among all applicants when determining the rate. Carefully weigh the advantages and disadvantages of using a cosigner before proceeding.
Prequalification for a mortgage loan could be a beneficial initial step in the mortgage process, offering an informal estimate of your borrowing capacity. Unlike mortgage preapproval, prequalification provides a quick assessment of your financial readiness to buy a home without the need for a lengthy application or documentation.
One downside of an adjustable-rate mortgage (ARM) is the uncertainty regarding future monthly payments after the fixed period ends. If interest rates spike, your payments may significantly increase, potentially straining your budget and necessitating refinancing to a fixed-rate mortgage.
While lenders can ask for your age during the application process, they cannot reject your application based solely on your age due to fair lending laws. Factors such as income and credit history are more critical in the evaluation process. Learn more about mortgage approval in retirement to understand how age impacts the process.
In estate planning, mortgages have unique considerations compared to other debts. It is essential to structure your will in a way that ensures a smooth transition of your mortgage obligations after your passing.
An estate plan plays a crucial role in determining the fate of your mortgaged property upon your passing, as well as the ultimate inheritance your loved ones will receive. To delve deeper into the implications for mortgages post-death and uncover strategies to preempt complications for your beneficiaries, explore our comprehensive guide.
Our writer, Kat Aoki, boasts a wealth of experience in finance writing, having authored a myriad of articles aimed at empowering individuals to navigate the realms of technology, fintech, banking, lending, and investments with clarity. Her insights have graced reputable platforms such as Lifewire and Finder, with her bylines adorning prominent technology publications in both the United States and Australia. Through her work, Kat endeavors to assist consumers and entrepreneurs in making well-informed choices and selecting financial products tailored to their specific requirements. This article has been meticulously reviewed and edited by Kelly Suzan Waggoner.
