Do you want to know how to get the best mortgage rate for an upcoming home purchase?
Getting the best mortgage rate is a significant concern for any home buyer. Everyone wants to get the lowest mortgage interest rate possible!
When you consider that only a few percentage points can cost you thousands over the life of a loan, it only makes sense to seek the best mortgage rate you can get.
Buying a home is already expensive. There is no reason to pay more than you have to. Unfortunately, many homebuyers do not take the necessary steps to get the most attractive mortgage terms.
When purchasing a house, one must understand how to get a mortgage. Being prepared offers significant advantages. Being completely comfortable with your finances is one of the keys to being smart.
Being in the real estate industry as long as I have, one of the most important things to potential home buyers is understanding how to get the best rate for a mortgage. By following simple time tested advice you can improve your odds of making it happen. This is one of my favorite discussions when meeting with clients because I know it can help them save a ton of money.
Let’s dive into how to get the best mortgage rates and terms.
Interesting Facts and Figures to Know
1. The lowest mortgage rate refers to lenders’ interest rate on a home loan.
2. To find the lowest interest rate, borrowers can compare rates from different lenders and financial institutions.
3. Getting an excellent mortgage rate may vary depending on credit score, loan term, and down payment amount.
4. Shopping around for the best mortgage rates can save borrowers thousands of dollars over the life of their loan.
5. A mortgage calculator can be helpful when looking for the lowest mortgage rates.
6. When evaluating the best mortgage rate, the interest rate and any associated fees or closing costs must be considered.
7. Approximately 82% of homeowners who qualify for the most desirable mortgage rates have credit scores above 720.
8. About 63% of borrowers opt for a down payment of 20% or more to secure more desirable mortgage rates.
9. Among those who secure the top interest rates, approximately 89% choose to lock in their rate for five years or more.
How and Why It’s Essential to Shop Mortgage Rates
When you visit a specific lender’s website and view mortgage rates, those rates are typical examples. The lender calculates these rates based on various assumptions about their sample borrower, such as credit score, location, and down payment amount. Sample rates may also incorporate discount points, which borrowers can pay additional fees to reduce the interest rate. The inclusion of discount points can make a lender’s rates seem lower.
To access personalized rates, you must input details about yourself and the property you intend to purchase. For instance, you can compare rates at many online sites by entering your ZIP code at the top of the page. On the subsequent page, you can refine your approximate credit score, desired loan amount, down payment, and loan term to obtain rate quotes that fit your circumstances.
When considering sample rates from lenders’ websites or comparing personalized rates, you will find that interest rates differ. This highlights the significance of exploring options when looking for a mortgage lender. Although fractions of a percentage may appear insignificant, they can have a notable impact. Lower rates reduce your monthly mortgage payment and decrease the total interest paid over the loan’s lifespan.
I recommend you get mortgage preapproval from a few lenders. Through preapproval, lenders authenticate certain aspects of your financial situation, ensuring that the rates and borrowing limits provided are accurate.
Each lender will provide you with a Loan Estimate, allowing for a simple comparison of interest rates and lender fees. When comparing rates, you’ll typically encounter two figures – the interest rate and the APR. The APR, or annual percentage rate, is usually higher as it considers both the interest rate and other expenses associated with the loan, such as lender fees.
Therefore, the APR is generally regarded as a more precise indicator of the borrowing cost.
Ways to Get The Lowest Interest Rate
Let’s look in-depth at how to get the best home loan terms. Here is what we will cover in this article:
- Shopping mortgage lenders
- Increasing your credit score
- Disclose past credit issues
- Strive for steady employment
- Make a sizeable down payment
- Use a mortgage broker
- Try a credit union
- Consider paying points
- Use an adjustable-rate mortgage
- Get a Good-Faith estimate
- Don’t have several credit checks
- Lock your mortgage
- Avoid credit mistakes
Comparison Shop Lenders For The Best Mortgage Rates
Depending on where you are financially and how many loans you have taken out before, you may be unaware of how much the variation in loan rates from one lender to another will affect what you wind up paying.
It can be tempting to grab any loan and feel lucky for the money, particularly for people buying their first home. But this is not a good idea.
Even if a home loan only varies by a fraction of a point, you could pay $10,000 or more in additional interest – depending on the amount borrowed and how long you take to pay it back.
Ten thousand dollars is enough to make even well-off individuals pause. Shop for your loan to avoid paying a lot more.
Work on Increasing Your Credit Score
Perfecting your credit is a must. Your existing credit is one of the most critical factors in getting the best rate on a mortgage.
Today, most people understand that their credit score is the single most significant factor in the loan rate they’ll receive from the lender.
However, not everyone realizes how important it is to repair their credit score before taking out a loan.
What more people should learn is how to increase their credit score! A few extra points could save you thousands of dollars over the life of your loan.
Fixing your credit can take time, but it is time well spent. Get your credit reports, challenge any incorrect information on them, and then go through the sometimes lengthy process of cleaning up your debts and collections.
You want your credit cards paid down or off before you attempt to borrow – at least if you want to get the best possible rate. Having an exceptional credit score is one of the ways you can get the best mortgage rate.
If you are unsure about what credit decisions are best, use Credit Karma. It is a free service that provides excellent financial advice.
Understanding Your Debt-to-Income Ratio
One crucial aspect often overlooked by prospective homebuyers is the significance of their debt-to-income (DTI) ratio. Your DTI ratio compares your monthly debt payments to your monthly gross income.
It’s a metric lenders use to gauge your ability to manage monthly payments and repay borrowed money. A lower DTI ratio signals to lenders that you are less risky, potentially leading to better mortgage rates.
I recommend you pay down high-interest debts to improve your DTI ratio and avoid taking on new debt before applying for a mortgage. This strategy can enhance your borrowing profile, making you more attractive to lenders and possibly securing a more favorable mortgage rate.
For example, if you have student loans or high credit card debt, do your best to reduce your balance. Debt consolidation loans can be helpful if you find better terms.
Be Upfront With The Lender About Past Credit Issues
Being upfront with your lender is crucial. If you are in a situation where some dings in your credit history cannot be easily repaired, try to be upfront with your lender about them.
After the problems in the 2000s with the real estate market and lending practices, all lenders are on high alert for any issues with borrowers. They will go through your information with a fine-toothed comb to ensure their safety in their lending practices.
It’s better to notify them now about issues than to be caught lying – possibly losing your chances of getting the loan. Honesty has an additional benefit.
The loan officer is there to help you get a loan, and they will often do a lot to see that happen. Letting the lender know about the issues now will allow the loan officer to advise and work with you to fix any major problems in getting the loan.
If you buy a home, your lender will issue a preapproval letter. The last thing you want to do is get caught in a position where you have exaggerated your finances. This could cause you to lose out on your potential dream home!
Work on Having Steady Employment
Individuals who demonstrate at least two years of steady employment and earnings, particularly from the same employer, may appeal more to potential lenders.
When applying for a mortgage, applicants should prepare to provide pay stubs from the 30 days before application and W-2 forms from the previous two years. Additionally, those who receive bonuses or commissions should have proof of receipt available.
Self-employed individuals and those with multiple sources of part-time income may have a more challenging time qualifying for a loan; however, it is not impossible.
Applicants may need proof of their business operations, such as Profit and loss (P&L) statements and tax returns, to complete the application process.
When making a career switch to a new industry, lenders should be noted to be more likely to flag the loan application. As such, it is essential to be mindful of such changes when applying for financing.
A lack of steady employment may not automatically disqualify an individual from obtaining a loan, yet the duration of the gap will be considered. For example, if a person has been unemployed for a brief period due to illness, they may be able to explain the lapse in their work history to their lender.
Securing approval can be challenging for individuals without employment for more than six months.
A Significant Down Payment Helps Get Better Terms
Pay as much down as you can. One thing has not changed about lenders – they still love a big house down payment. Before buying a home, try to come up with as much money as possible to put down on it.
A more significant down payment will make you look favorable to the lender and improve your mortgage.
The less money you have to borrow – and therefore pay interest on – the less you will pay in interest. And interest can be a killer on a big home loan paid off over 30 years.
The average down payment for a first-time borrower is six percent.
Down Payment Gift Money Can Help
If you can only come up with so much cash, consider asking family members or friends for help. If they are in a position to assist you with the down payment money, most lenders will accept such money as long as it is accompanied by a letter demonstrating that it is, in fact, a gift.
Use a down payment gift letter to demonstrate the money is coming from viable sources.
As long as you don’t have to repay the money, the lender will view it as an improvement to the loan. If you can get to a 20 percent down payment, by all means, do so!
By putting down at least 20 percent, you avoid private mortgage insurance, or PMI for short. This type of insurance protects the lender in the event of a borrower’s default on the loan.
It is money that you are mostly throwing away every month as it does nothing for you. If you cannot find the 20 percent needed to avoid PMI, you should do whatever you can to eliminate it as soon as possible.
Use a Mortgage Broker to Get The Mortgage Rate That’s Best
Using a mortgage broker could be your best bet to get the most attractive interest rate. Over the many years of selling real estate, quite a few of my clients have asked me why they should use a mortgage broker.
My answer is simple—a mortgage broker can get financing from different sources with which they have built relationships. Since they have many sources to turn to, the odds are better; they can find a better deal for you than if you went shopping on your own.
For example, let’s say you want to take out a loan for $250,000. You prefer a fixed rate over thirty years and don’t want to pay any points or closing costs.
When you walk into the local lender and get their rates and terms, these may not be the best you can get. You have limited yourself to getting the best deal by visiting one financial establishment.
A mortgage broker will take your desire for a 30-year fixed rate with no points and closing costs and shop it to numerous lenders. This really can be a win-win for you!
Consider a Credit Union
In some circumstances, a credit union could make sense. Many banks are willing to lend money to home buyers. Unfortunately, not all of them will give you a good deal.
Some will offer you a bad deal, so keep your guard up when shopping around for a mortgage. Many people discover that their local credit union has better lending policies for its members than regular commercial banks.
The members own the credit union, which is incentivized to care for its members. This means you might be able to get a better loan with your credit union.
Granted, this is not always the case. But it certainly doesn’t hurt to shop around with credit unions and banks before deciding on a mortgage.
The Impact of Loan Types on Your Mortgage Rate
Researching different mortgage types can significantly affect the interest rate you receive. For instance, government-insured loans, such as FHA, VA, and USDA loans, might offer more favorable terms for eligible borrowers, including lower interest rates.
Conversely, conventional loans might provide more flexibility but could come with higher rates for those with less-than-ideal credit scores.
Understanding the nuances of each loan type and how they align with your financial situation and homeownership goals is essential. I always recommend that my clients consult with my preferred mortgage broker. He can help you navigate these options and choose the loan that best suits your needs. This could potentially save you thousands over the life of your mortgage.
An excellent real estate agent can do the same for your location.
Paying Points Will Give You a Lower Mortgage Rate
Should you pay points to get a premium mortgage rate?
Sometimes, it makes sense to pay points, and sometimes it does not. For those that don’t know, a point is one percent of the amount you are mortgaging.
So, if you are mortgaging $250,000, one point would equal $2500. Paying points reduces your interest rate. The more points you generally pay, the lower rate you will get.
Projecting how long you will remain in the home can help you determine whether it makes sense to pay points or not.
You need to understand the difference between mortgage payments and points. For a certain period, the difference will be made up by how long you remain at the property.
The longer you stay at home, the better off you will be by paying points. Another option could be if rates drop by a large margin and you find yourself refinancing immediately.
When getting the best mortgage rate, the points you pay will have a significant bearing.
Should You Get a Fixed or Adjustable Rate Mortgage?
Does a Fixed or adjustable rate mortgage make the most sense?
Again, whether you should go with a fixed or adjustable rate comes down to timing. If you only plan on being in the home for a short period and adjustable rates are significantly lower than a fixed rate, it could be a good idea to go that route. Only you can decide.
Sometimes, if there is not that big of a spread, it might not be worth the gamble, especially if rates rise and your plans change. While you can get a lower interest rate when you choose an adjustable-rate mortgage, a fixed-rate mortgage gives you more stability.
Look at All Your Mortgage Program Options
You may need to step outside your comfort zone for the best mortgage rate. Most borrowers think about getting a conventional loan.
However, many other loan programs are available for first-time buyers. Some popular programs include FHA mortgages, VA loans, and USDA loans.
If you qualify for these mortgage programs, you may be able to get better loan terms.
Get a Good Faith Estimate When Shopping For Home Loans
Get a good faith estimate in an excellent idea. Mortgage lenders are now required to give you a “good faith estimate” of all the costs associated with your loan.
A good faith estimate will help intelligently compare apples to apples with the loan terms you are considering.
For example, while one lender may have a 1/4 percent better rate, what if the costs they are charging associated with the loan are significantly higher?
While you may think the loan with a 1/4 percent rate is the winner, it may not be! It is crucial to scrutinize all fees and buyer closing costs with a fine-tooth comb.
Don’t Have Too Many Credit Checks
Limit your mortgage shopping to two weeks. Your credit score can only weather so many credit inquiries before it begins to drop.
If you keep shopping for mortgages beyond 14 days, it could lower your credit score – the last thing you need when you want to get the best possible mortgage. Search carefully and compare all your options, but avoid doing so for too long.
Lock Your Mortgage Rate Before It Rises
It is essential to lock your rate when appropriate. One of the things a good mortgage broker or lender can do for you is give you their best guess on where interest rates are headed.
If the trend is moving downward, it may make sense to hold off on locking your mortgage rate. If that is not the case and interest rates are trending upward, ensure you lock your rate!
Over the years, I have seen people needlessly gamble for as little as a 1/8 of a point. There are times when gambling like this does not make sense, especially if your finances are tight. You could easily cost yourself getting the best mortgage interest rate by being a gambler.
The Role of the Federal Reserve and Economic Factors
While individual financial health is vital in getting a favorable mortgage rate, broader economic factors also play a critical role. The Federal Reserve’s interest rate policies directly influence mortgage rates, with rate hikes typically leading to higher mortgage rates and vice versa.
I always recommend you follow where rates are trending to achieve the best results.
Inflation, economic growth rates, and global economic events can also impact mortgage rates. You can lock in a lower rate by staying informed about these factors and timing your mortgage application accordingly.
However, predicting market trends is complex, and consulting with a financial advisor or mortgage professional can provide valuable insights and guidance.
Avoid Mortgage Mistakes Before Closing on Your House
Once you have your mortgage commitment letter, don’t think you are out of the woods before closing on your home. Some borrowers have made mortgage mistakes that have prevented them from getting a loan.
Following the advice above, you should be able to get the lowest mortgage interest rate.
Final Thoughts
Striving for the best mortgage terms is an intelligent thing to do. It will allow you to pay off your mortgage quicker, saving years of mortgage interest.
Hopefully, you have enjoyed these tips on how to make it happen.
More Helpful Articles on Getting The Best Mortgage
- How to shop for the best mortgage rate – get some helpful advice on how to get the best mortgage rate. Shopping for different lenders is an excellent move when buying a house. When you speak with multiple lending institutions, you will be more apt to find the best mortgage rate.
- The best ways to get the lowest mortgage refinance rates – see more tips on getting the best mortgage terms from lenders.
Use these additional helpful resources to get your next mortgage’s best terms and conditions. Remember that getting the best mortgage rate could save you thousands of dollars!
About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on how to get the best mortgage rate. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. For the past 38+ years, Bill has helped people move in and out of Metrowest towns.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge Massachusetts.
I thought that your advice to be upfront with your lender about your credit history and any problems there really stood out to me. I would have thought that being upfront with issues you might have could possibly have a negative effect. You talk about how letting the lender know about any major problems will allow them to give you advice on your situation. This makes perfect sense. I think that this would be super beneficial because you can effectively work on your financial issues. Getting the best mortgage rates is important to most people. Thank you for the insight!
I agree that comparing lenders can help you to make sure that you are getting the best mortgage rates possible. This type of thing can be so confusing and it is hard to feel confident when your making decisions. I appreciate your helpful tips and information to ease the minds of homeowners like this. Thank you for your article, I will be keeping this in mind!
Natalie you are right. Getting the best mortgage rates possible is a confusing topic because there are so many programs out there and buyers sometimes have problems factoring in the costs they are paying which can dramatically impact what they are really getting!
These are great tips on getting the best mortgage. Thanks for sharing an informative and updated article. I am sure a lot of aspirants will like this.
I love your tips for getting a good mortgage loan. Like you said, credit is a huge factor for getting a good mortgage. If a few extra points could save me thousands on a loan, I need to start repairing my score!
Great work. I really appreciate the insight here in this post and confident it’s going to be helpful to me and many others. Thanks for sharing all the information and tips.
My sister is buying a house, and I’m trying to help her get a good mortgage rate. I appreciate the information about how you should compare lenders so that you can get the best rate. Another thing to consider is to get a company to help you that you trust and know is easy to contact is something happens.
Having a good mortgage broker or lender who is able to give you their best guess on where interest rates are headed is a good idea. Being able to see where the trend is moving is a great way to prepare for the future.
Great article, I’ve been cleared on some questions I’ve always had questions about.
Thank you