How to Find the Best Loan Rates

Bankrate.com

While the credit crunch is clearly dampening consumers' borrowing power, the lending well hasn't run completely dry. Lenders still want to lend, but borrowers will need to dig deeper to get the best rates.

The Federal Reserve probably plays the most visible role in influencing rates, as it orchestrates money supply. Contrary to popular belief though, when the Fed trims rates, the effects don't necessarily trickle down to every credit and loan product.

Between September 2007 and April 2008, the Fed cut the federal funds rate 3.25 percentage points, from 5.25 percent to 2 percent. Yet over that time frame, the average 30-year fixed-rate mortgage actually rose, according to Bankrate data.
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Rates on other loan products did fall, including those for home equity lines of credit, or HELOCs, auto loans and variable rate credit cards. Their rates are pegged to the prime rate, which moves in tandem with the federal funds rate.

Knowing what influences interest rates may help you negotiate a better deal the next time you need to borrow money.

The Skinny on Mortgage Rates

What Impact Rates

Fixed-rate mortgages are influenced by the current economy and investor expectations.

"Fixed-rate mortgages are pegged to long-term interest rates, like the 10-year Treasury note and are not connected to short-term interest rates controlled by the Fed," says Greg McBride, Bankrate's senior financial analyst.

Short-term rates do affect adjustable-rate mortgages, or ARMs, because the indexes to which they are pegged are shorter term in nature, says McBride.

"Adjustable rate mortgages are often pegged to the one-year Treasury or a short-term LIBOR index, either of which is more closely correlated with the short-term interest rates under the Fed's control," he says.

Risk-averse lenders reeling from record losses from the subprime mess are impacting mortgage rates, too. Lenders are requiring tougher underwriting standards on new mortgages.

Investors who buy mortgage-backed securities are demanding higher yields to compensate them for taking higher risks.

These factors have prevented mortgage rates from falling lower than they are today.

It's tough to lend money for homes while housing values remain uncertain, says Bob Walters, chief economist at Livonia, Mich.-based Quicken Loans.

Highs and Lows

"If you're lending against something that you think continues to lose value, how do you make your (lending) rule when you make a loan in May and by July you're upside down on that loan?" he says.

Over the past five years, 30-year fixed-rate mortgages have ranged from a low of 5.28 percent in June 2003 to a high of 6.93 percent in June 2006. In recent weeks, rates have been approaching those 2006 levels.

Fifteen-year fixed-rate mortgages over the past five years ranged from a low of 4.71 percent in June 2003 to a high of 6.57 percent in June 2006.

And 5/1 ARMS, for which Bankrate has data for two years, ranged from a low of 4.99 percent in February 2005 to a high of 6.67 percent in June 2007.

For information on the latest mortgage rates, see Bankrate's mortgage survey.

How to Get the Best Rate

Until the mortgage crises fully ebbs, lenders will likely continue to tighten their mortgage lending standards.

You'll need proof of stable income, preferably a tenure of two or more years at the same employer, a FICO score of at least 720 score and a verifiable down payment -- plus cash reserves, says Ritch Workman, president of the Florida Association of Mortgage Brokers.

"That's our poster-child borrower," he says. "They're the ones being offered the best rates."

With zero-down-payment loans going the way of the horse and buggy, expect to cough up more money at closing to qualify for the best rates -- especially if you're near the conforming loan limit for your area. (Conforming loan limits vary according to area, but are predominately $417,000. A conforming mortgage is one that is eligible for purchase or securitization by government-sponsored enterprises such as Fannie Mae and Freddie Mac.)

"It pays to strategize to either make a larger down payment or borrow less money so you can get that mortgage under that conforming loan limit and at a lower rate," McBride says.

Another rate-reducing strategy is to pay discount points or an origination fee upfront. Both fees are expressed as a percentage of the loan amount, and both will decrease the interest rate of a mortgage, but will increase the amount of cash you need at closing.

On a $200,000 loan, a 1 percent origination fee (also called loan-processing fee) will mean $2,000 out-of-pocket at closing.

Origination fees may or may not be negotiable. Some lenders won't write a loan without an origination fee, says Workman.

How much do discount points lower your mortgage rate? It depends on what's going on in the mortgage market, but one point usually lowers the interest rate by one-eighth to three-eighths of a percentage point. General rule of thumb: One discount point equals a quarter-point rate reduction.

Paying points generally means reduced monthly payments and interest over the life of the loan, but you'll need to consider how long you plan to stay in the home to see if the trade-off is worthwhile.

"If it takes more than 24 to 36 months to pay off the point, it's typically not worth it financially because most Americans sell or refinance their home within five years," Workman says.

The Skinny on Home Equity

What Impact Rates

Home equity loans are pegged to long-term interest rates like the 10-year Treasury notes, while home equity lines of credit, or HELOCs, have variable interest rates pegged to the prime rate. The prime rate moves in lock step with Fed interest rate changes.

With home equity loans, borrowers get money upfront in a lump sum at a fixed interest rate and make the same payment each month for the loan term.

HELOCs are lines of credit that allow the borrower to draw money periodically when needed. The interest rate can vary, depending on the prime rate, and the borrower may have the option to make interest-only payments over specific periods of time.

Interest rates for HELOCs are favorable now because Fed actions over the past year have driven down the prime rate.

However, lenders looking to avoid exposure from falling home prices and foreclosures have taken to freezing or reducing HELOCs in some areas and making home equity loans harder to get.

Home equity loan rates over the past five years ranged from 6.62 percent to 8.19 percent for $30,000 loans. Over the past year, the rate has averaged about 8 percent.

HELOC rates over the past five years have ranged from a low of 4 percent in August 2003 to a high of 8.25 percent in September 2007. Over the past year, they have averaged in the neighborhood of 6.8 percent.

Bankrate's Interest Rate Roundup gives you the latest information on home equity loan and HELOC rates.

Know your credit profile and take action while interest rates are low.

Consumers with FICO scores of 720 or higher, low debt-to-income and low loan-to-value ratios, and high cash reserves are getting the best rates on HELOCs right now, according to Ritch Workman, president of the Florida Association of Mortgage Brokers.

To get the best rate, it pays to comparison shop. Compare home equity loan rates and HELOC rates offered in your area on Bankrate.com.

Highs and Lows

Home equity loan rates over the past five years ranged from 6.62 percent to 8.19 percent for $30,000 loans. Over the past year, the rate has averaged about 8 percent.

HELOC rates over the past five years have ranged from a low of 4 percent in August 2003 to a high of 8.25 percent in September 2007. Over the past year, they have averaged in the neighborhood of 6.8 percent.

Bankrate's Interest Rate Roundup gives you the latest information on home equity loan and HELOC rates.

Know your credit profile and take action while interest rates are low.

Consumers with FICO scores of 720 or higher, low debt-to-income and low loan-to-value ratios, and high cash reserves are getting the best rates on HELOCs right now, according to Ritch Workman, president of the Florida Association of Mortgage Brokers.

To get the best rate, it pays to comparison shop. Compare home equity loan rates and HELOC rates offered in your area on Bankrate.com.

How to Get the Best Rate

Know your credit profile and take action while interest rates are low.

Consumers with FICO scores of 720 or higher, low debt-to-income and low loan-to-value ratios, and high cash reserves are getting the best rates on HELOCs right now, according to Ritch Workman, president of the Florida Association of Mortgage Brokers.

To get the best rate, it pays to comparison shop. Compare home equity loan rates and HELOC rates offered in your area on Bankrate.com.

The Skinny on Credit Cards

What Impact Rates

Variable rate credit cards are pegged to the prime rate and rise and fall with movements of the Federal Reserve.

Fixed-rate cards are a bit of a misnomer because the interest rate is not really fixed. Rates can change at the card issuer's discretion with as little as a 15-day notice.

However, credit card companies are quicker to react when rates are rising.

"Cardholders are more likely to see fixed rates increase when interest rates rise than they are to see fixed rates decrease when interest rates are falling," says Greg McBride, Bankrate's senior financial analyst.

Interest rates on gold and platinum cards are often lower, and have higher credit limits and annual fees.

They may come with added perks such as rental car insurance, travel points and cash-back rewards, but consumers generally need higher credit scores to qualify for them.

In the mid-1980s, when credit card use first became widely adopted by consumers, standard fixed-rate cards carried an 18 percent-plus rate, and this trend persisted for many years, peaking in July 1991 at 19 percent. Rates finally began dropping significantly only about 10 years ago, when they vacillated between 14 percent and 16 percent. Over the past year, they averaged around 13 percent.

Gold and platinum cards generally offer lower rates to qualified customers with higher credit scores. Over the past three years, interest rates on gold fixed cards hovered in the 11 percent to12 percent range. Platinum fixed-rate cards ranged from a low of 9.8 percent in January 2006 to a high of 10.79 percent in February 2008.

Bankrate's Interest Rate Roundup gives you the latest information on credit card rates.

Card issuers are raising the bar higher when it comes to who gets the best rates.

"The whole spectrum is shifting, whereas in the past, card issuers might go after any consumer that has a credit score of 600 or better; today that's shifted to 650 or better," says Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research.

Consumers hunting for good deals should look for banks that haven't been stung by subprime lending and are still actively going after new cardholders.

"Those are where the real deals can be found when you're shopping around for a credit card," says Cundiff.

Try to correct anything on your report that can be perceived as a potential blemish. You can order a free copy of your report from each of the three major credit-reporting agencies once every 12 months.

Consumer sites that compare credit card offers can also save you money in the long run.

Bankrate provides credit card information based on individual issuers, card type and credit type.

Highs and Lows

In the mid-1980s, when credit card use first became widely adopted by consumers, standard fixed-rate cards carried an 18 percent-plus rate, and this trend persisted for many years, peaking in July 1991 at 19 percent. Rates finally began dropping significantly only about 10 years ago, when they vacillated between 14 percent and 16 percent. Over the past year, they averaged around 13 percent.

Gold and platinum cards generally offer lower rates to qualified customers with higher credit scores. Over the past three years, interest rates on gold fixed cards hovered in the 11 percent to12 percent range. Platinum fixed-rate cards ranged from a low of 9.8 percent in January 2006 to a high of 10.79 percent in February 2008.

Bankrate's Interest Rate Roundup gives you the latest information on credit card rates.

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How to Get the Best Rate

Card issuers are raising the bar higher when it comes to who gets the best rates.

"The whole spectrum is shifting, whereas in the past, card issuers might go after any consumer that has a credit score of 600 or better; today that's shifted to 650 or better," says Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research.

Consumers hunting for good deals should look for banks that haven't been stung by subprime lending and are still actively going after new cardholders.

"Those are where the real deals can be found when you're shopping around for a credit card," says Cundiff.

Try to correct anything on your report that can be perceived as a potential blemish. You can order a free copy of your report from each of the three major credit-reporting agencies once every 12 months.

Consumer sites that compare credit card offers can also save you money in the long run.

Bankrate provides credit card information based on individual issuers, card type and credit type.

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