The mortgage interest rate is often the one thing most people focus on when obtaining a mortgage. Because this number has such a great impact on the amount of your payment, it is no wonder everyone wants to get the lowest rate possible. Here are 10 ways to help you get the lowest rate available to you.
- Fix your credit score — If you do not have perfect credit, get to work on it. See what you can do to make the score higher. Look at things like how much credit you have outstanding compared to your credit limits; how many late payments you have in the last 12 months; and how many collections and/or judgments you have. If you have anything negative reporting on your credit report, see what you can do to fix it. For example, start consistently paying your bills on time or pay down the outstanding debt you have, including collections.
- Make a higher down payment — The down payment is your investment in the home. The more money the lender has to lend to you, the higher their risk becomes. If you want to lower your risk, you need to put more of your own money down. The lower your LTV, or loan-to-value ratio, is the lower the lender’s risk. The most common down payment is 20 percent, but not everyone can afford that high of a down payment. Even if you cannot get to that amount, you should try to use as much of your own money as possible towards the home in order to lower your interest rate.
- Stabilize your employment — The longer you hold the same job, the less risk you pose to a lender. If you continually change jobs, you do not come across as a good risk to a lender. Banks want to see that you are stable in your job so that your income does not change. They base your eligibility for the loan on the income you make right now. If that income will not continue for the long-term, the lender has no way to determine if you will continue to be able to afford the loan. Most lenders want to see a stable employment history for the last 2 years. If you know you will apply for a mortgage in the next few years, try to stay at the same job for the duration of that time.
- Keep your debt-to-income ratio down — The lower your debt-to-income ratio is, the less risky you are to the lender. Your DTI shows the lender how much of your monthly income goes towards your bills and how much you have left over for daily expenses and savings. The higher your DTI, the more money you have to commit to your bills every month. Most lenders will not allow a total debt ratio higher than 43 percent on any loan. This does not mean you should allow your debt ratio to get that high; the lower your DTI, the lower the mortgage interest rate the lender can provide you.
- Have plenty of assets — Aside from your down payment, the lender likes to see cash in your account for reserves. This is money you could use should your income become compromised. This money could be in a checking, savings, money market, or CD. Any account the lender can determine is liquid counts, which means you can turn the asset into cash immediately. The lender counts the reserves by the number of months of mortgage payments it would cover. If you have six months’ worth of reserves, for example, the lender might consider this a compensating factor and lower your quoted interest rate slightly.
- Shop around — Every bank offers different rates for one reason or another. Some banks sell their loans on the secondary market, which means they have investors they must keep happy in order to sell the loans. Other banks keep the loans on their own portfolios, which means they are in charge of the rate they provide. This could work in your favor, depending on how many compensating factors you have to provide the lender. The fact of the matter is, though, that you cannot predict the rate each lender will quote you, so take the time to shop around. When you have a quote from several lenders, you can then decide which one is right for you.
- Check out your different loan options — Sometimes you can secure a lower interest rate when you choose a different program. If you know you will not stay in the home you purchase for more than 5 years, for example, check out the interest rates on an adjustable rate mortgage. Most programs adjust after five years, giving you a low teaser rate for those first five years. This is a great way to save money in the beginning stages of the term of your loan, especially if you will not be staying there.
- Purchase a single family home — Any other type of property can require you to take a higher mortgage interest rate, especially condominiums. This property type is known to depreciate faster than single-family homes during a housing crisis. The solidity of the condo is also dependent on the other homeowners in the unit. If a majority of homeowners are late on their association payments, for example, it can put the association into financial trouble which can then affect the condo units. A single family home operates on its own and is often rewarded with an interest rate 1/8th of a point lower as a result.
- Escrow your taxes and insurance — If the thought of adding your taxes and insurance to your mortgage payment makes you cringe at the amount you will pay, it might make you feel better to know that the rate should be lower if you do this. Lenders look at setting up an escrow account as an advantage because they know the debts will get paid. This means the lender does not have to worry about you defaulting on your real estate taxes or not holding homeowner’s insurance. If you did not pay your real estate taxes, the county could take over your home. If you did not pay your homeowner’s insurance and disaster were to hit your home, the bank would lose again. This is why they reward borrowers that opt for an escrow account.
- Lock your rate in for the short-term — The longer you lock your mortgage interest rate the lower your rate will be. The best method to use is not to lock your rate until you know you are going to close. For example, if you purchased a house, don’t lock the rate until the appraisal is complete and you know the loan will go through. This way all that is left is the work the underwriter needs to do, which is more controllable than waiting on the appraiser.
The lower your interest rate, the more principal you will pay off each month. Of course, you should not focus strictly on the rate, as there are many factors that play into the success of your loan, including the amount of closing costs you pay. The more research and shopping around you do, the more likely it is that you will get the loan you want.