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A lower mortgage rate can translate to thousands of dollars in yearly savings. That said, it would be advisable to look into options to help keep the rates low and take advantage of them where possible. Outlined below is a brief outline of how you can lower your mortgage rates.
1. Add a point to your credit score: A single point on your credit score can significantly impact your mortgage rate. If you have 679 FICO points, you’ll be charged higher than an individual with 680 points. Looking for ways to boost your credit score, even by a single point, can help.
2. Don’t overlook ARM (adjustable-rate mortgage): This option is most favorable if you don’t intend to keep the property for too long. With an adjustable-rate mortgage, you will be paying much less than if it were a fixed rate.
3. Lock faster: Like loans, a short mortgage lock period translates to fewer fees than longer ones. This is to stay; a 30-day lock on mortgages will save you more money than if you were to go for, say, a 60-day lock.
4. Minimize borrowing: Most lenders use your loan-to-value ratio to calculate interest rates. This basically is your loan amount versus the value of the property. Clients with a lower ratio are often considered low-risk customers and enjoy lower interest rates than those with higher ratios.
5. Don’t be afraid to window-shop: According to a survey conducted at Stanford University in 2012, consumers are more likely to save at least 10% in fees when they window-shop and obtain more than 4 quotes, compared to those that get one or two. Getting quotes from more providers can thus help you find a more affordable option.
How to Make Low Rates Even Lower
Although you might have control over most factors that influence mortgage rates (international events, employment reports, etc.,) you still might be able to push the rates down, even for a moment. One of the oldest tricks is to sit, watch, and wait for the perfect time. Recent times have seen mortgage rates hit an all-time low and have continued to hover there for some time now.
Some things you can change to influence your mortgage rates include application readiness and credit scores, to name a few. Here are some of the proven ways to lower the already ultra-low mortgage rates.
1. Work on Your Credit Score (Even 1 Point Counts)
Improving your FICO score (even by a single point) can significantly save you thousands of money in lower mortgage rates. Unlike government mortgage programs, most lenders use your credit score as a baseline to determine whether or not you qualify for a mortgage and at what rate. This is mostly calculated in 20-point tiers, though even 1 point can make a huge difference. This is so especially if you have 679 points instead of the required 680 points.
Here is a chart showing credit tiers and associated fees per loan amount
|Fico Score||Fees||Next Tier Savings|
|620 – 639||3.25%||–|
|640 – 659||2.75%||$1,500|
|660 – 679||2.25%||$1,500|
|680 – 699||1.25%||$3,000|
|700 – 719||1.00%||$750|
|720 – 739||0.5%||$1,500|
Use this chart to calculate your projected rates and how much you’d save if you improve your credit score. Making credit card payments on time, for example, can help improve your scores significantly.
Inaccurate information on your credit score could also be hurting your scores. Contacting your lender or reporting body to fix the errors can help improve your scores. The only way you’d be able to catch some of these errors is if you take a good look at your credit report and history. While it might cost you about $50 per account with the credit bureau, it is worth every dollar, considering the savings you’d record at the end of the day.
Little to no credit can also have an impact on how much you can access and related rates. Although you can build a credit history and score from scratch, becoming an authorized user with someone with a good credit history (family member or friend) can help boost your scores too. Be sure to check the individual’s credit report, history, and score before linking your account with theirs. If possible. Try paying your credit card balances down to 30% of the limit to earn a higher FICO Score.
2. Don’t Ignore Adjustable-Rate Mortgage
While mortgages are known to be long-term loans (sometimes lasting more than 30 years), they don’t necessarily have to. You still have several shorter plans you can work with, depending on what you prefer. An adjustable-rate mortgage (ARM) would be ideal for those looking to keep the property for a few years. A 7-year ARM, for example, can have a lower interest rate than a 30-year fixed mortgage rate.
ARMs also attract a lower introductory rate too. You can thus choose to own the house for the 7 years, then choose to refinance or even sell before it starts adjusting. Here is a chart showing how these rates are calculated for 3/1, 5/1, and 7/1 ARMs and a 30-year fixed loan.
|Loan Type||Mortgage Rate||Payment Savings||Period Savings|
|5-year ARM||2.5%||$121||$7,270 (5 years)|
|7-year ARM||2.75%||$81||$6,804 (7 years)|
You can make substantial savings on ARMs during the teaser period. The savings could ‘evaporate’ or diminish if it however enters the adjustment period.
3. Learn To Close Fast
It is a no-brainer; a shorter mortgage lock period translates to lower costs. Mortgages typically have a 30-day lock on a quote. Although you could go for the 60-day lock period, it will cost you much more. You could however save about .125 if you close sooner or within the 30-day lock period. How can I close fast? You may ask.
First, you’ll need to review and correct all errors on your credit report. Most lenders can help you check your report for errors. You could also do so by pulling the free Annual Credit Report offered by the government. In addition to this, you’ll need to prepare all documents the lender may need to process the application. This includes account statements, pay stubs, w-2s, Tax returns, business licenses, homeowners’ insurance, and explanations for credit glitches. With these documents ready upfront, chances of closing fast are greatly improved.
4. Limit Borrowing
Lenders will calculate your mortgage rates based on your loan-to-value or LTV. This is a formula used to compare the value of your property and loan amount. For example, an eighty-thousand-dollar loan on a $100,000 home has a loan-to-value ratio of 80. A lower ratio tells the lender you are a less risky client, allowing them to charge lower interest rates on the same. For example, an applicant with an LTV of 85 can get a rate discount of about 0.50% more than one with an LTV of 95. In addition to this, keeping your LTV lower than 80% also reduces/eliminates the need for mortgage insurance premiums, thus more money in your pocket.
In a study conducted by Stanford University (2012), a consumer is more likely to save money by shopping for more mortgage providers than simply sticking to the first that comes their way. According to the study, consumers with at least 4 mortgage quotes saved approximately $2,700 for a $200,000 mortgage compared to those with only one or two quotes.
It would also be advisable to request these quotes on the same day. Mortgage rates can change drastically due to a number of factors, a reason you should also ask for a loan estimate when shopping for a home loan. Most lenders use scenarios and worksheets when calculating the quotes. This is to protect both themselves and the consumer. You could knock off a digit or two from your mortgage rates with little effort and persistence.
Although it is impossible to tell if mortgage rates will go lower than they already are, getting a quote for the same can go a long way in reducing your mortgage rates. Be sure to lock a quote, especially if the rate seems workable.