Key Takeaways
- A high credit score is crucial for securing the best mortgage rates.
- Increasing your down payment can also significantly lower your mortgage rate.
- It’s essential to compare rates from multiple mortgage lenders and loan types to find the best fit for your needs.
- Tactics such as buying mortgage points and taking advantage of rate locks to manage fluctuating market conditions can help you get the best mortgage rate.
6 Ways To Get the Best Mortgage Rate
Securing the most favorable mortgage interest rate can profoundly impact your financial journey as a homeowner. Below are six effective strategies to help you obtain the best mortgage rate, resulting in long-term savings and a more manageable home loan.
1. Improve Your Credit Score
Your credit score is a critical factor in determining the mortgage rates you’re offered. The higher your score, the lower the interest rates lenders are likely to propose. Scores in the 700s — especially in the high 700s — typically qualify for the most competitive interest rates. Lenders perceive individuals with high credit scores as lower-risk borrowers, thereby offering them better rates.
If you have a lower credit score, it’s important to begin monitoring your credit and adopt score-boosting strategies. Jason Lampert, a certified financial planner at Woodson Wealth Management, suggests prospective homebuyers “begin working on improving their credit scores at least a year or even several years before applying for a mortgage.”
Regularly reviewing your credit report helps identify and rectify any errors. Paying bills and credit cards on time, reducing your debt-to-income ratio and avoiding new credit inquiries can also positively influence your score. DTI is the amount of monthly debt obligations as a percentage of your monthly income.
“Every additional point of creditworthiness can result in lower cost of borrowing, resulting in thousands of dollars less in interest,” said Lampert. Consistent, responsible financial behavior over time is key to boosting your credit and getting the best mortgage rates.
2. Increase Your Down Payment If Possible
A larger down payment can substantially improve the mortgage rates you receive. Conventional mortgage loans generally require a down payment of anywhere between 3% to 20% depending on the lender you choose, the location of your home and the state of your finances. The more you can afford to pay upfront, the lower your interest rate is likely to be. (Plus, you’ll save on private mortgage insurance when you increase your down payment amount.)
For those who find it challenging to meet conventional loan down payment requirements, programs such as Federal Housing Administration loans can be a viable alternative. FHA loans allow for down payments as low as 3.5%, making homeownership more accessible, though possibly at higher interest rates.
3. Compare Rates Across Multiple Lenders
Obtaining rate quotes from a variety of lenders — including local banks, credit unions, online lenders and mortgage brokers — can help you find the most advantageous deal. While it might be tempting to stick with familiar financial institutions, exploring a broad range of options can lead to more competitive rates.
For instance, local banks and credit unions often provide personalized services and may offer more advantageous rates to members. Online lenders can offer convenience and potentially lower rates due to their reduced overhead costs. Mortgage brokers can help you compare rates from multiple lenders, potentially uncovering options you might not find on your own.
Ultimately, it’s a good idea to investigate multiple sources of loan options to ensure you’re getting the best deal. As you’re doing so, thoroughly research your potential lenders before contacting them to verify they’re a reputable company and to avoid scammers.
4. Research Loan Types and Terms
The type and term of your loan significantly affect your interest payments. Shorter loan terms, such as a 15-year mortgage, typically come with lower interest rates compared to 30-year fixed-rate mortgages, though this also means higher monthly payments.
Using a mortgage calculator is a handy way to estimate your potential monthly mortgage payments. A mortgage calculator considers various factors like the loan amount, interest rate, loan term, property taxes and homeowner’s insurance.
Additionally, you might consider the possibility of a hybrid adjustable-rate mortgage (ARM). ARMs start with a fixed interest rate period followed by adjustable rates that fluctuate according to underlying market conditions. However, be aware that ARMs may be attractive initially, but carry the risk of rate increases in the future.
5. Consider Mortgage Points
Mortgage points, also known as discount points, allow you to pay fees upfront in exchange for a lower interest rate over the life of the loan. This strategy can be cost-effective in the long run, but it requires a break-even analysis to determine if you will recoup the upfront costs through the savings gained from lower interest rates.
If you do choose to purchase mortgage points to lower your interest rate, these fees will be included in your closing costs.
6. Time Your Rate Lock
Since mortgage rates fluctuate daily, timing your rate lock can be crucial. Use tools and expert advice to help you predict rate movements and decide the optimal time to lock in your rate. However, be cautious about floating your rate, as it involves the risk of rates rising before you lock in.
Why Your Mortgage Rate Matters
Your mortgage rate is likely the most influential factor in determining the total amount you’ll pay over the life of the loan, particularly with long-term commitments like a 30-year mortgage. This is why you need to develop a plan for getting the best mortgage rate.
For instance, let’s consider a $300,000 mortgage balance. At an 8% interest rate over 30 years, the total interest paid — not including the principal balance — would amount to $492,466. However, if the rate were at 7.75%, the total interest paid would drop to $473,725. That’s a saving of almost $20,000 over the life of the loan, all from a modest reduction in the interest rate.
The Bottom Line
Ultimately, your mortgage rate can have a big impact on your long-term financial health. Even modest differences in interest rates on long-term loans can save you tens of thousands of dollars.
Comparing lenders and loan types can help you sift through mortgage offers to find the best one for your situation. Additionally, increasing your credit score and putting down a larger down payment are two of the best ways to secure a lower mortgage rate.
Once you’ve chosen a lender, consider locking in your rate while you search for homes. After you’ve found a home and finalized negotiations, buying mortgage points can further lower your long-term costs before you complete your mortgage application.
FAQ: Getting the Best Mortgage Rate
What credit score is needed for the lowest mortgage rates?
To qualify for the lowest rates, you typically need a credit score in the 700s or higher. Lenders view borrowers with higher credit scores as less risky, which often results in more favorable interest rates.
How much down payment do you need for the best mortgage rates?
A down payment of 20% or more is generally considered ideal for securing the best mortgage rates. A larger down payment reduces the risk for lenders and can lower the interest rate they offer. However, a smaller down payment of 10% or 5% can still qualify you for competitive rates
Who has the absolute lowest mortgage rates right now?
Mortgage rates fluctuate regularly, so it’s crucial to shop around and compare rates from multiple lenders to find the best deal. However, it’s important to remember that individual rates may vary depending on your creditworthiness, down payment amount, loan type and other factors.
