In this article
- 1. Check Your Credit Scores And Reports
- 2. Improve Your Credit Score
- 3. Save Up for a Bigger Down Payment
- 4. Consider Shorter Loan Terms
- 5. Increase Your Income
- 6. Reduce Your Debt
- 7. Apply with A Minimum of Three Lenders
- 8. Watch Mortgage Rates
- 9. Think About Paying Discount Points
- 10. Refrain From Making Any Major Financial Moves
When it comes to taking out a home loan, ensuring that you secure the best mortgage rate is a crucial part of the process as it helps save you a lot of money over the life of the loan. Consider this, over the course of a 30-year loan, a 3.75% interest rate can save you more than $5,000 for every $100,000 borrowed as compared to a 4.00% interest rate. In larger loan amounts, this interest difference can translate to a lot more money saved. With this in mind, here are 10 expert tips for getting the best mortgage rate.
Regardless of whether you are applying for your first mortgage or a subsequent one, taking the following steps will help you get the best mortgage rate and potentially save you a lot of money. These also apply whether you are taking out the mortgage to purchase a home or refinance.
1. Check Your Credit Scores And Reports
A fundamental step before commencing any efforts to secure the best mortgage is to check your credit scores and reports with the three major credit bureaus namely TransUnion, Experian, and Equifax. As an example, here is how to do this on Experian and what you need to look for.
Experian allows you to open a free account on their website where you can check your FICO Score 8 and also get insights on what areas of your credit you need to improve.
To check your FICO Score 2, you will need to pay $4.95. According to Experian, FICO Score 2 is the credit score that the majority of lenders use. You can use the Experian Boost tool to slightly improve your credit score by adding your utility and mobile phone bill payment history.
Also, make sure to go over your credit reports, checking for inaccuracies that may be bringing your score down. If you find any issues, open a dispute by phone, online, or by mail.
Use AnnualCreditReport.com to get free copies of your reports from the three credit bureaus. But note that it doesn’t give scores. You have the option to receive a free report every week through April 2021.
Find out more about how your credit score impacts the rate you get and if it is worth paying for a special version of your credit score.
2. Improve Your Credit Score
If you discover that your credit score is below 760, it is important that you take measures to improve your score. This includes making payments on time and paying down your balances. Having a healthy credit score not only gives you access to more options, but it also helps you secure lower interest rates. You can use the Loan Savings Calculator by myFICO to determine how much you can potentially save by raising your credit score.
A healthy credit score also qualifies you for the lowest rates even if your down payment on a conventional loan is less than 20%. However, even with a poor credit, you may still be able to find a good loan option by doing some research.
3. Save Up for a Bigger Down Payment
The problem with putting down a small amount on the purchase of a home is that lenders will consider you a higher-risk borrower than borrowers who make bigger down payments.
To account for this risk, lenders will require private mortgage insurance (PMI). If you make a down payment of less than 20% on a conventional loan, you will be required to pay PMI premiums. PMI will have an impact on your monthly payments and total borrowing costs. Fortunately, you can have it canceled later on after building up enough equity on the house.
You can completely avoid PMI by saving up for a bigger down payment. But even if you can’t manage to put down 20% or more, a larger down payment will help lower your PMI payments. What’s more, a bigger down payment will help you secure a lower mortgage rate.
By investing more of your money in the property, you help reduce your risk level in the eyes of the lenders, making them more willing to offer you a lower interest rate.
If you are struggling to save up, check Down Payment Resource to find out whether you qualify for any down payment assistance programs in your area. This strategy also works if you are refinancing. Bring cash to closing to raise your equity.
4. Consider Shorter Loan Terms
Instead of taking out a standard 30-year fixed-rate mortgage, think about going for a 15-year fixed-rate mortgage since the interest will be much lower. For instance, in mid-September 2020, the rate for a 30-year loan was 2.87% while that of the 15-year was 2.35%.
You can also choose to go for an adjustable-rate mortgage (ARM). One great thing about ARMs is that they normally have a lower introductory rate than fixed-rate mortgages. For instance, a 5/1 ARM had a rate of 2.96%.
However, even though you might be getting a lower rate on ARM, there is a significant amount of risk to consider. While this option may be cheaper in the early stages, it can end up being far more expensive in the long run than you expected.
The reason behind this is that once the introductory period lapses, there is no telling what the interest rates will be like and whether you will be able to sell or refinance once the period ends.
5. Increase Your Income
All variables aside, as a lender, who would you choose to lend money to?
a) A borrower with a $8,500 monthly salary who will have to spend $3,000 (35.3% of their income) on mortgage and other debt payments, or
b) A borrower with a $7,000 monthly salary who will have to spend $3,000 (42.8% of their income) on mortgage and other debt payments
To minimize your risk, you will definitely want to lend to the first borrower. It only makes sense that with a higher income compared to your debt, the easier it will be for you to manage your finances during rough times. If your financial situation shows that you will be able to keep on top of your monthly mortgage payments even during hard times, they will be more willing to offer you a lower rate. The key is to keep your debt-to-income (DTI) ratio 36% or less.
Granted, securing an extra source of income on short notice is easier said than done, however, there are other ways of improving your DTI ratio.
6. Reduce Your Debt
Making steps to reduce your debt rather than struggling to increase your income – or combining both if possible – will help to improve your DTI ratio. Obviously, having extra income puts you in a better position to settle your debts, but you can also review your budget and cut down on your expenses. This way, you can direct more funds to paying debts. As per the 2020 National Association of Realtors Home Buyer and Seller Generational Trends report, 41% of homebuyers canceled vacation plans, reduced their spending, and decreased monthly payments on other bills.
Besides reducing your DTI ratio, carrying less debt also offers a number of other advantages. Lowering your debt also improves your credit score. However, your income has no bearing on your credit scoring. Experian advises keeping your credit usage below 6%. Thus, in case you have $10,000 of available credit through your credit cards, it will be best to keep your balance across all cards under $600.
7. Apply with A Minimum of Three Lenders
Don’t forget that thousands of mortgage lenders out there want your business, and all offer different rates. So, make sure to shop around to find the one that offers you the best rate.
You should get a loan estimate from each of the lenders. It is a three-page standardized document that contains information like the mortgage’s interest rate and closing costs, as well as other important information like how much the loan will cost in the first five years. However, loan estimate comparison with the aim of getting the best deal involves more than just checking the interest rate and APR. If you are looking to keep the loan for the long term, securing the lowest mortgage rate should be a bigger priority than having to pay the lowest closing costs. The opposite applies to shorter-term loans.
8. Watch Mortgage Rates
It is important to note that interest rates are always fluctuating. And while short-term changes are usually small, ensure that you lock your rate when it is at the most favorable level for you. Better yet, lock your rate when rates are trending down. Be ready to take advantage of a possible drop in rates by monitoring the rates.
For instance, according to a survey by the Freddie Mac’s Primary Mortgage Market, someone looking to take out a 30-year fixed-rate mortgage in September 2020 will want to know that over the past year, the average rates ranged from a 3.78% high in October 2019 to a low of 2.86% in mid-September. The most qualified borrowers can expect an interest rate close to 2.86% if paying 0.8 in points and fees. But these are just average rates, and aim to secure a better-than-average rate.
9. Think About Paying Discount Points
Discount points are fees that borrowers can pay at closing to lower their mortgage rate. If you are looking to keep your loan for a long time, paying points can be worthy consideration. However, paying points may not be worthwhile if you plan on refinancing or selling in the near future. 1 point = 1% of your loan amount. For instance, 0.8 points would cost $1,600 for a $200,000 loan.
How much you are able to lower your mortgage rate with discount points often depends on market conditions, but a 0.25% rate reduction per point is the standard.
10. Refrain From Making Any Major Financial Moves
After going through all the effort to improve your credit score and become a strong applicant, the last thing you want is to jeopardize your standing with lenders. Try as much as possible to keep things as they were when you got approved for the loan. This means not applying for additional loans or switching careers.
The problem with making any major decisions that potentially affect your financial situation is that they make you seem like a riskier borrower. As a result, the lender may choose to place a higher interest rate on your mortgage or even disqualify you for a loan. Keep in mind that your loan approval is only final after the underwriting process. Avoid giving the underwriter any reason to rethink your status as a strong applicant.