How to get a lower interest rate on your mortgage shouldn't be a mystery.
Navigating the mortgage loan process can be daunting the first time around, but that doesn’t mean you should give up on buying a home. You just have to do your homework.
Experts recommend comparing loan options and taking steps to increase your chances of qualifying for the lowest interest rates. Securing a rate just half a percentage point lower may not seem like a huge deal on the front end, but you can save thousands of dollars in the long term.
Read on for advice from lenders on how to increase your chances of getting the best rate.
Lower your debt-to-income ratio
Most lenders require a debt-to-income ratio of 45 percent or lower before they’ll loan you money.
Take steps to reduce your debt or increase your income if your ratio is higher, says Kevin Flannery, senior loan officer at Mortgage Master in Walpole, Massachusetts. Start by paying down your credit card balance or any other loans you have.
Get a credit report
Lenders use your credit score as a major factor in determining what loan interest rate you can get, says Norma Rowe, co-owner of Cobblestone Mortgage Corp. in Waxhaw, North Carolina.
“A score of 740 or greater qualifies you for the best rates,” she says. “For every 20 points your score drops, there’s an increase.”
Try to get a credit report six months before applying for a loan. This should give you enough time to make sure everything’s in order and remediate any errors. Avoid making major purchases or opening new lines of credit during this time to dodge lowering your score.
Rowe suggests pulling the report yourself so you don’t incur any hard inquiries from lenders on your credit, which could also lower your score.
Put down as much as possible
Most conventional loans require a down payment between 5 and 20 percent, although some will accept less. The more you save for a down payment, the lower your interest rate.
“Twenty-five percent down with great credit is almost a guarantee you’ll get the best rate regardless of the property or loan size,” Flannery says.
If you can’t afford at least 20 percent, in some cases you’ll have to pay for mortgage insurance. Because you’ll start with less equity in the house, the bank assumes a larger risk of loss by loaning you money.
Choose a type of rate
You’ll have a choice between two types of mortgages: fixed rate and adjustable rate. A fixed-rate mortgage maintains the same interest rate through the life of the loan, which is good if interest rates rise during that time. However, if interest rates fall, you won’t benefit unless you refinance.
Adjustable rate mortgages generally start with a lower short-term interest rate but can fluctuate throughout the life of the loan based on market rates. They’re risky, Rowe says, because you’ll pay less if interest rates decrease but more if they increase.
“However, an adjustable rate could be a better option for someone who knows they’ll be in that loan for less than the term that it’s fixed,” she says.
Lock in a rate
Once you submit your loan application, you can choose to lock in a rate immediately or wait in hopes the market rate improves, a process known as floating.
In a floating rate scenario, your rate will move with the market until you lock it. You could pay less if market rates go down, but you also risk paying more if they increase.
“You can lock in a maximum of 60 days before closing, longer if your home is new construction, although most people choose to lock within 30 days,” Rowe says.
Were you happy about your mortgage interest rate? Tell us about it in the comments section below.