Best Interest Rate
When you’re ready to buy a home, you’ll be entering a process that you may have only been vaguely aware of previously. You may have known that interest rates were at historic lows just a few years ago, but you weren’t ready to buy a house then. Now that you are, rates are changing and the rates your friends secured then are simply no longer being offered.
Still, there are steps you can take to get the best rate possible at any time. We’ll give you our best advice for how to get the lowest possible mortgage rate right now, no matter when you’re applying for a mortgage loan.
What Is A Mortgage Rate?
For most home buyers embarking on their journey to buy a house, they’ll first need to get a mortgage loan.Lenders make these loans in return for your interest payments. Your mortgage interest rate is applied to the amount of the loan, and your monthly mortgage payment is made up of principal, interests,taxes,and insurance collectively known as PITI.
Mortgage rates determine how much interest accrues on your home loan. The higher your rate, the more interest you’ll pay and the more you’ll end up paying for your house in total.
10 Tips For How To Get The Best Mortgage Rate
With mortgage rates, lower is better. So, how do you go about securing a low one? There are a few strategies you can employ to get the best mortgage rate possible.
Tip 1: Start Saving For A Bigger Down Payment
If settling down in your own home is your dream, the earlier you start saving for down payments, the better.
How much down payment will you need? It will depend on the type of loan you choose. For a conventional loan, you’ll need at least 3%, while an FHA loan requires a 3.5% down payment. You can get a no-down-payment mortgage if you’re able to take advantage of a VA loan or USDA loan.
Many home buyers new to the market are under the misconception that you need a 20% down payment for a conventional loan. That’s not the case. The 20% figure came from the private mortgage insurance (PMI) requirement on conventional mortgages: If your down payment is less than 20%, you’ll need to pay PMI premiums till you reach that threshold of home equity.
Accumulating more assets will help you get a better mortgage rate. Assets are things not related to your annual income that could be used to help pay off your mortgage. This could be proceeds from the sale of property, stocks, bonds, mutual funds or other investments.
The more assets you have, the greater your ability to repay your mortgage and the lower your interest rate will be.
Tip 2: Check Your Credit Score And Report For Errors And Problems
Your first active step toward homeownership should be to get your credit report and proofread it carefully to identify errors and get them corrected. This process can take a while, so it’s important to start early and be persistent about getting mistakes corrected.
Tip 3: Work On Improving Your Credit Score
Your credit score is probably the most important single factor in determining whether you’ll be approved and if so, for how much and at what interest rate. Interest rates reflect factors beyond your control, so the best you’ll be able to do is get the lowest rates available.
But interest rates also reflect your lender’s assessment of the risk you present as a borrower. Your credit score helps lenders predict your future behaviour as a borrower based on how you’ve handled your debts in the past.
All lenders look at your credit score and history to determine your mortgage eligibility. In general, the higher your credit score, the lower your rate. You keep your credit score up by making timely payments for your house, car, credit card and so on.
Tip 4: Reduce Your Debt-To-Income Ratio By Paying Off Debt
Your debt-to-income ratio is another important factor that lenders consider to evaluate your ability to repay the loan. If you are carrying a heavy debt load, your lender might find your financial situation unsustainable, and therefore set a higher rate to compensate them for being willing to take the risk.
Let’s say you make $5,000 a month and you pay $1,250 of that toward your student loans, house and car payments. Your DTI is 25%. The lower this ratio is, the less risky you look for the lender – and your rate will be lower.
While you don’t want to close every account, it can be helpful to pay off certain debts. This can help decrease your DTI and free up more money to spend toward your monthly mortgage payment. Less debt can mean a lower mortgage rate.
Should you save for your down payment or pay down debt? It’s important to find the right balance between the two. Lenders don’t expect you to be completely debt-free. Some debts are considered “good debt” by lenders, particularly student loans and reasonable car loans when reliable transportation is necessary for work.
Other debts, like revolving credit card debts, are frowned upon by lenders. High credit card balances are often a sign that borrowers are using credit to supplement their income instead of living within their means.
Tip 5: Choose Between A Fixed-Rate And Adjustable Rate Mortgage (ARM)
You’ll have to make several decisions when it comes to choosing among the types of mortgages available when you are planning to buy a house. From a financial perspective, one of the single most important choices you’ll make is between a fixed rate mortgage or adjustable rate mortgage.
Fixed Rate Mortgages
With a fixed-rate mortgage the amount of your payment will stay the same over the loan term. That means your lender is making a very large loan to you whose terms can’t be changed for the next 15 – 30 years. Even if interest rates skyrocket, your fixed-term loan payments won’t change.
Because lenders are taking all of the risk that interest rates will rise when they make a fixed-rate mortgage loan, they charge more upfront. There’s a big difference between 15- and 30-year fixed rates as well, which reflects that lenders are assuming that risk for twice as long.
Adjustable-Rate Mortgages (ARMs)
Adjustable rate mortgages(ARM) work a bit differently. They typically start with a lower rate. This initial rate remains fixed for the first several years of the loan – typically a period of 5, 7 or 10 years. After that, the rate will periodically adjust up or down according to the market.
Because you can end up paying much more in interest rates, you are sharing with your lender the risk that interest rates will go up. That’s why they can afford to offer the introductory rate to entice new home buyers.
Fixed-Rate Vs. ARMs: Which Is Better?
As usual, the answer depends. Had you asked during the early years of the COVID-19 pandemic, the answer would have likely been to lock into a fixed rate because mortgage rates were at historic lows. Now, interest rates are on the rise,and ARMs are becoming increasingly popular once more.
If you’re not planning to stay in your new home for longer than the introductory period, or you’re comfortable refinancing your mortgage before the initial rate expires, an ARM might be your best choice. Be aware, however, that if you don’t sell or refinance, ARMs are much more expensive for home buyers over the life of the loan.
Tip 6: Consider Prepaid Mortgage Points
Prepaying this interest will get you a lower rate. The trade-off here is that you have to stay in the home long enough to reach a position where you save money. If buying two points on a $250,000 mortgage (two points equals $5,000) saved you $300 per month on your mortgage payment, you’d have to stay in the home for 17 months to break even. If you plan on staying in the house for several years, buying mortgage points can be a good way to save money.
Tip 7: Choose A Shorter Loan Term
You can save a lot of money over the life of your loan if you choose a 15 year instead of a 30 year repayment term. By shortening your loan term, you can also get a lower interest rate upfront. As we discussed previously, it’s far less risky to predict repayment 15 years out than it is to predict 30 years out. You’ll also build home equity much faster, which reduces your loan-to-value ratio and lender risk.
Among the added benefits of a 15-year repayment term is that you’ll reach the 20% home equity mark, meaning you can stop PMI sooner. You’ll also pay off your mortgage loan sooner, removing a huge chunk of your monthly budget.
However, the monthly mortgage payment on a 15-year loan is significantly higher than that of a 30-year mortgage, and the pandemic housing market has put purchase prices out of reach for many, so it’s most important to be sure that you can afford your monthly mortgage program.
Tip 8: Make A Higher Down Payment
A higher down payment at closing will get home buyers a lower rate. Putting down a significant portion of the purchase price lowers the relative risk for a lender. The lower your loan-to-value ratio the more you’re considered a good investment. The higher your down payment, the less a lender has to give you so you can afford the home.
Keep in mind, though, that using all your cash for a down payment leaves you vulnerable should some unforeseen circumstances arise. Lenders like to see you have reserve funds to cover up to three months of expenses, just in case.
Tip 9: Raise Your Income
It sounds simplistic, but realizing the road ahead is very expensive can focus your mind on maximizing income. This can be as simple as asking for a raise, looking for a higher paying job, completing educational requirements for starting a side hustle. Whichever route you choose, increasing your income before you buy will ease the budgetary burden of homeownership.
Tip 10: Watch And Wait
Keep an eye on interest rates and the housing market while you’re preparing to apply for a mortgage. Although it’s not advised that you attempt to “time the market” – waiting for a perfect moment – it does make sense to act when interest rates are lower, or at least before they get any higher.
Current Market Interest Rates
There are many economic factors that affect interest rates in the broader borrowing marketplace. Current economic conditions, the pandemic and geopolitical conflicts have driven rates up.
A “good” interest rate can mean a rate that is low relative to the current market. You can get a sense for this by looking at today’s mortgage rates and seeing what typical rates look like right now.
If you’re curious, you can also take a look at historical mortgage rates to see how much interest rates have changed over the years. What was good in the 1970s, for example, is going to be very different from what is considered good now.
