Obtaining a lower mortgage rate is always the goal for a homebuyer. A lower mortgage rate means lower monthly payments, less interest, and maybe even a bigger and more expensive home.
However, qualifying for such a mortgage rate is something else. You have to put in the effort. On top of that, you need to have good credit and ready with a good-sized down payment.
1. Get Your Credit Ready
Both your credit history and your credit score can have a serious impact on your available interest rates and even your capability of qualifying for a mortgage to begin with.
Keep in mind that the better your credit score, the better your loan interest will be. Recently, Monday.com surveyed more than 8,000 lenders. Researchers found that any borrower who had a credit score of 740 or better got a mortgage rate of 3.096%. However, those with a credit score under 640 got a mortgage rate of 5.096%.
So you want to check your credit score at home before you start the task of looking for a refinance loan on your mortgage. It’s always a good idea to raise your credit score before looking if you think it’s too low for the rate you want.
You’ll also want to start on the following: settle any overdue balance, lower any balances you do have, and ask for an increase in your credit line. All of these are great ways to increase your credit score.
2. Save Up For That Down Payment
You will want to make sure you have enough to afford a 10% to 20% down payment. It may not always be necessary to go that high; however, it doesn’t hurt. The bigger the down payment, the less the lender has to finance for you.
Think of it this way, the lower the rate, the lower the risk. The higher the percentage, the higher the risk. If you, as a homebuyer, can manage to put together a down payment of more than 20%, you’ll usually get a lower interest rate.
You’ll also want to keep in mind that when you place a more significant down payment, it helps you avert any private mortgage insurance. Private mortgage insurance can cost you anywhere between $30 to $70 per month.
3. Pay Down Your Debt
Mortgage lenders will ultimately use a debt-to-income ratio to gauge your capability to afford a mortgage. The debt-to-income ratio is your monthly debt payments divided by your monthly gross income.
For instance, if your monthly income is $4,000, and your monthly debt is $2,000 a month, your debt-to-income ratio is 50%. However, that is too high to qualify for even the lowest interest rate. Usually, you want to have below a 42% debt-to-income ratio.
If you are a borrower whose debt is above 42%, you will want to either increase the income you have coming in or pay off some debt.
4. Get Quotes From Multiple Lenders
Lesson number one, don’t settle for the first mortgage rate you find. Shop around. Find multiple mortgage quotes and weigh your options. Would you buy the first car you see? Not likely, so don’t settle for the first quote that comes across your path, either.
As you shop around for mortgage rates, remember that interest will vary greatly depending on the lender. You’ll want to find at minimum three different lenders with quotes from each. You will also need to ask for a loan estimate, a document that will detail your costs from each lender. It’s crucial to your mortgage rate process.
If you’re not the type of person who likes to spend time getting quotes from various lenders, you’ll want to check out a mortgage broker. A mortgage broker will do all the dirty work for you. They come with an additional fee of 1-2%, which is added to your loan amount.
5. Choose The Right Type Of Loan
Another thing you can do to lower your interest rate is to shorten your loan term. The only catch with shortening your loan period is that your payments will increase per month. As a borrower, you will want to prepare for these costs if you decide you want a shorter term.
You’ll also want to be cautious when it comes to adjustable-rate mortgages. With adjustable-rate mortgages, the rate can always go up after 5 to 10 years. If you don’t plan to be in your house too long, an adjustable-rate mortgage could potentially help you save cash. They will be to know how long you plan to stay in your home.
6. Consider Buying Discount Points
So discount points will let you buy lower interest rates. Basically, a point will cost you about 1% of your loan amount. Discount points aren’t right for everyone; however, if you really want to lower your rate, it’s possible.
However, you will want to make sure you can break even before you decide to buy points.
7. Don’t Forget to Lock In Your Rate
When you find the interest rate you like, make sure you lock it down with your chosen lender. This will protect your loan’s interest rate so it can’t be altered before the loan closes. Be cautious, though, as locked-in rates can sometimes cost you extra money.
- Yale, Aly J. “How to Get the Lowest Mortgage Rate: A Step-by-Step Guide.” Money, 30 July 2020, money.com/get-the-lowest-mortgage-rate/.