How To Get The Best Mortgage Rate
The real estate market is on fire right now thanks, in part, to record low interest rates. So, if you’re interested in purchasing a home, you might be wondering, “How do I get the best mortgage rate?” Well, the mortgage rate you qualify for is determined by a few different factors, including your credit score, borrowing risk, and the current prevailing rate. Here we’ll explain how to increase your chances of getting a good mortgage rate.
Increase Your Credit Score
If you’re wondering how to get the best mortgage rate, first look at your credit score. The higher it is, the better your chance of securing a better interest rate on your mortgage. This goes hand-in-hand with your Debt-to-Income Ratio (DTI). The lower your DTI and debt, the chance of getting the best mortgage increases. These two factors are arguably the most important when it comes to determining your mortgage rate.
But, don’t fret if your credit score is on edge a bit; a slight boost can make a big difference. According to recent rate data from FICO, increasing your score from 659 to 680 could reduce your interest rate by 0.60%. So, focus on getting that number up quickly by:
- Checking your credit report for any errors and notifying the credit bureau.
- Request an increase in a credit line, but don’t use it.
- Become an authorized user on someone else’s account.
This is certainly not an exhaustive list but is a great starting point for increasing your credit score to help get the best mortgage rate.
Save Up For A Down Payment
The amount you have available to use as a down payment affects your loan-to-value ratio, determining your mortgage rate. While you can always put down less (as little as 3.5% with an FHA loan), increasing your down payment is a great way to get the best mortgage rate. Why? Because the more you have to put down on the home, the less the lender has to loan you, therefore the less of a risk you are. Lower-risk borrowers get the best interest rates. So, can you put a little more aside each month to go towards the down payment? Ideally, aim for 20% of the cost of your home with more set aside for closing costs and two months of mortgage payments.
Consider Using Points
You can have some sway in your interest rates by choosing to use Points or Lender Credits. Using Points means you pay a percentage of the total mortgage out-of-pocket, which buys down the rate. In other words, you pay more upfront to get a lower monthly interest rate. Just ensure you are planning to stay in the home long enough to reach your breakeven point. That’s when the savings you get from the lower interest rate are better than your points’ cost. If you leave the house too soon, this option might not make sense.
Opt For A Shorter Loan Term or ARM
Typically, shorter-term loans have lower interest rates because they are less risky for lenders (they’re not loaning you the money for as long). Doing a quick calculation on Get A Rate’s Purchase Calculator shows that someone with the same loan amount and credit score saves over 0.60% by switching from a 30-year mortgage to a 15-year mortgage. Just remember, it can mean you will have higher monthly payments.
The other option to get the best interest rate is to consider an adjustable rate (ARM). This means you can secure a low rate for a certain number of years, but it could go up during your loan term. If you’re planning to only stay in the home for a few years, an ARM could be a solid choice.
Don’t Make Major Career Changes
We keep bringing up risk levels because the banks are constantly looking at it to determine your interest rate. In addition to increasing your down payment and credit score or considering a shorter loan term, keeping your employment steady can help you get the best mortgage rate. Ideally, lenders like to see two years with the same employer. So, if you can, don’t change jobs or quit close to when you’re applying for the mortgage. Better yet, consider increasing your income with a part-time job or side-hustle for a bit. The short-term sacrifice can equal significant savings with your mortgage rate.
How To Get The Best Mortgage Rate
Ultimately, many factors go into determining your interest rate. The tips above are a great place to start to help get the best mortgage rate possible. Get A Rate can do a lot of this searching for you by using technology that searches through thousands of rates and programs. So, you can feel confident knowing you’re getting the best mortgage rate in your home buying process.
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