Shopping for a home loan is important. You want competitive interest rates to save money, especially in today’s market. However, even though interest rates have increased, it doesn’t mean you should accept the first rate you’re offered. There are many ways to find the lowest rates possible, even in a high-interest rate environment.
Here’s what you must know.
Tips to Find the Best Mortgage Rate
Many borrowers quickly accept the first rate and loan term they’re offered. They don’t bother to shop around. Many borrowers fear it will hurt their credit if they apply for too many loans.
Here’s a secret. The credit bureaus don’t hit you for more than one inquiry when you shop around.
However, there’s a trick.
You must get the rates within a few weeks. If there is too much time between quotes, you’ll get hit with multiple inquiries. If you do it within a short time, though, it won’t hurt your credit, and you’ll find the best rate.
The key to getting the best interest rate, though, is to maximize your qualifying factors. It sounds complicated, but it’s easier than you think. You can ensure you get the best rates with a few steps and a little legwork.
Here’s how.
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Improve your Credit Score
Lenders first consider your credit score when you apply for a loan. It’s their first impression of you, so it’s best to make it good.
If you aren’t sure what your credit looks like, get a free copy of your credit history here. Look for any issues that could cause your credit score to fall, such as late payments, collections, or credit lines with over 30% of it outstanding.
Fix your credit as best you can so that when you apply for a mortgage, you have a great credit score and qualify for the best rates and terms.
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Put More Money Down
The more money you invest in the home, the less risk a lender takes. Each loan program has a minimum down payment requirement, but if you can put down more, it will help your case.
A 20% down payment is ideal, but if you can’t put down that much, get as close as you can. The more you invest in the home, the lower your loan-to-value ratio is, which allows lenders to give you better mortgage rates.
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Stabilize your Employment
The more stable your employment is, the more likely you will get the best rates and terms. Lenders like knowing you have been at the same job for a while. This increases the chances that you’ll stay there and can afford your loan payment.
A borrower that ‘job hops’ is a higher risk because there’s no stability with their employment and income. Your risk of not paying the loan increases if you don’t have a stable employment history. This usually means lenders will give you a higher interest rate or tougher mortgage terms.
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Keep your Debt-to-Income Ratio Low
Your debt-to-income ratio compares your monthly debt to your monthly income. Therefore, the more debt you have, your chances of defaulting on your mortgage increase.
Lenders try to avoid that by maxing out the debt-to-income ratio at 43%. However, if you have an even lower DTI, you’ll increase your chances of approval at a much lower interest rate.
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Take a Shorter Term
If you can afford a shorter-term loan, take it. The less time you take to repay the loan, the less risk you pose to the lender.
15-year loans have the lowest interest rates, but 20 and 25-year loans have better rates than a 30-year term. So, any time you can shave off the traditional 30-year term will save you money in interest.
Other Ways to Get the Lowest Interest Rate
Once you’ve maximized your efforts to improve your qualifying factors, here are a few other ways to ensure you get the lowest rates.
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Pay Mortgage Points
If this is a long-term purchase, you can ‘buy’ your rate by paying mortgage points. Each point you pay is one percent of your loan amount and lowers your interest rate slightly.
Make sure it makes sense to pay points before you do. For example, if you have short-term plans for the home, it doesn’t make sense. However, it might be worth it if you stay there for a while.
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Shop Around
Don’t get quotes from just one lender. Instead, get quotes from several lenders. You can shop them yourself or work with a mortgage broker and let them do the legwork for you.
You might be surprised at the difference in rates when you get quotes from three to five lenders.
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Lock in your Interest Rate
Lock it in when you find the rate that fits your budget and you are happy with it. Of course, don’t do this until you’ve found a home and signed a sales contract, but don’t let too much time pass.
With today’s volatile rates, it’s important to lock your rate in as soon as possible but not so soon that it expires before you are ready to close.
Final Thoughts
Getting the lowest interest rate on your mortgage is possible. It takes maximizing your qualifying factors and shopping around for the right rate. Each lender has different risk tolerances and allows different qualifying factors.
Find the rate that works best with your budget and maximizes the investment in your home. If you can’t find the low rate you want, consider paying discount points or saving more money to put down on the home to reduce your LTV, as most lenders offer lower rates with lower loan-to-value ratios.
