How to Get the Very Best Mortgage Rate
A home loan is a long-term debt, one that will likely stay with you until you’re old and gray, and one that will eclipse any other loan that you acquire throughout your life.
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It’s imperative, therefore, that you find a mortgage with low-interest rates; a mortgage that will lead to lower interest payments over the life of the loan and, preferably, leave more money in your bank at the end of each month.
That’s not an easy feat to achieve but there are a few ways you can get a lower interest rate and a more manageable monthly payment while still securing the house of your dreams.
Whether you’re a first-time home buyer or a seasoned real estate investor, these tips will help you secure the best possible mortgage rate.
Improve Your Credit Score
Your credit score is one of the most important considerations in getting a low mortgage rate. A low credit score and a credit report littered with derogatory marks will likely lead to a rejection for pretty much any type of mortgage. A high credit score, however, will increase your options and allow you to secure the best rates.
Lenders may look at FICO Score or VantageScore to calculate your credit score. It doesn’t really matter which one they choose. The only thing that matters is that your credit report is clean, your payment history is unblemished, and you have a high credit utilization ratio.
If your credit score is weak right now, then start making some changes to ensure it’s stronger when you need it. Some loans, including FHA loans and VA loans (offered by the Federal Housing Administration and Veterans Association respectively), will allow you to secure a mortgage with a higher credit score, but you may pay a higher interest rate and your options will also be limited.
Improve Your Debt-to-Income Ratio
Your debt-to-income ratio or “DTI” is an important part of the home buying process and will dictate what kind of annual percentage rate you’re offered and whether you’re even provided with a home loan or not. It’s calculated by comparing your total monthly debt obligations to your gross income, and mortgage lenders generally want to see a ratio that is lower than 50%.
To calculate your DTI, simply add all your gross income for the month and then compare this to your debt payments. If you earn $6,000 every month and have $3,000 worth of debt payments leaving your account, that means your DTI is 50%, as $3,000 is 50% of $6,000. This is generally at the upper limit of what a mortgage lender will accept. Anything more and you may be refused for a mortgage loan.
You can improve your DTI by increasing your income or reducing your debt. Clear as many of the balances as you can or refinance the loans to reduce monthly payments.
Reduce Your Loan Term
You could reduce your total balance by tens of thousands of dollars by applying for a 15-year mortgage term instead of a 30-year mortgage term.
As an example, a 30-year mortgage with a 4% APR and a $200,000 balance will cost you $954 a month and $343.000 over the life of the loan. By applying for a 15-year mortgage instead, you will pay nearly $500 more per month, but close to $90,000 less over the term.
That’s a huge saving considering you don’t have a lower rate and haven’t increased your down payment. It’s all about the term, because the longer your loan is, the more the interest will grow and the higher your total interest will be.
Of course, it’s a big ask to find an extra $500 a month, but if you do your sums and calculate how much you can afford to spend, you can adapt your mortgage accordingly, getting the best rate from all mortgage lenders simply by shaving a few years off the total.
Save for a Bigger Down Payment
A down payment makes a massive difference as it essentially reduces the size of the loan. If you’re buying a $200,000 house with a 5% down payment, you’re requesting a loan of $190,000. But if you increase that to 20%, you’re only asking the lender for $160,000, which is significantly less and will impact your loan in many ways.
Your monthly mortgage payment will be smaller, as the balance is smaller and there is less room for interest; you can look at reduced terms, thus saving even more, and you can also avoid paying private mortgage insurance (PMI) which could cost you up to $100 a month.
As an example, let’s say that you are making a 5% down payment and have budgeted for between $1,000 and $1,200 a month on a $200,000 house. With a 30-year term and a $190,000 mortgage, you’ll pay around $910 a month and this will take you above $1,000 when allowing for insurance premiums and property taxes.
However, if you put down 20%, your monthly payment will be just $760, and you won’t need to pay extra for PMI. As a result, you could reduce the term to 20-years, spending a couple hundred more per month but saving a massive $50,000 over the life of the loan and greatly reducing the time it takes to repay.
Of course, saving for a bigger down payment is easier said than done. But this is not a process you need to rush. Take your time, make some sacrifices, sell some of your belongings, and reduce your credit card and personal loan debt, thus leaving more money in your bank at the end of the month. After a few years, you should have saved a lot more money and can think about paying a little more money upfront.
Shop for the Best Mortgage Rates
It should go without saying, but you’d be surprised at how many borrowers take the first offer they receive or simply go with a bank they know and trust. But by comparing rates offered by different lenders, you can save on everything from closing costs to fixed-rate mortgage and adjustable-rate mortgage rates.
Comparison shopping is easy and there are many sites that can help you with this, cycling through multiple loan types (VA loans, FHA loans, USDA loans, Conventional loans), mortgage interest rates, and providers to see which one is best for you and which bank or credit union you should apply to.
Conclusion: Stay Patient, Ask Questions, Work Hard
Whatever option you choose, it’s important to stay patient, try as many of these tips as you can, and speak with a debt specialist or mortgage broker if you have any questions.
Once you secure a better rate, get a preapproval and start looking for a home. When you find one you like, be tough in the negotiations and don’t pay a penny more than you originally budgeted for. Think about every dollar that you’ll spend in terms of how much it will increase the loan amount and how much extra it will cost you every month.
Your hard work doesn’t end when you have your new home. Every extra cent you put towards your monthly payment and every windfall you throw at the balance will take you one step closer.
If you find yourself in a much better position than when you first applied, think about refinancing at the lowest rate possible. Mortgage companies won’t offer you this rate just because you have shaved a few points off your FICO credit score; you’ll need to reduce your term or pay some extra cash to make it a reality.