With mortgage rates reaching eye-watering highs (and showing no signs of declining anytime soon), it may seem impossible to secure low-interest rates. You might even wonder if it’s possible to finance a home purchase at all. But don’t despair! You can still secure the best mortgage interest rates and achieve your homeownership dream! Keep reading to learn how to get the best interest rate for your mortgage.
Key Takeaways:
- To get the best interest rate for your mortgage, you’ll need a good credit score. So, if possible, boost your credit score before you apply for a mortgage.
- A higher down payment often qualifies you for better interest rates since the lender will have less risk.
- Lenders will offer different types of mortgages depending on your credit score, debt-to-income ratio, and employment, so shop around for mortgage lenders.
Boost Your Credit Score
A lower credit score may not bar you from getting a mortgage, but it can be the difference between securing the lowest interest rate and being hit with more costly borrowing terms. As such, boosting your score is an excellent first step if you’re wondering how to get the best interest rate for your mortgage.
Why is the credit score crucial? A credit score is a vital factor in determining risk. Your lender will use the score to benchmark in deciding your ability to repay the debt. The higher the credit score, the more likely that you won’t default. For instance, you can generally be considered for a conventional mortgage if you have a 620 or higher score, but the best mortgage rates will go to borrowers with the highest credit scores (usually 740 and above).
To boost your credit score, here are a few things you should do:
- Pay your bills on time
- Pay down or eliminate credit card balances
- Pay down your debts
- Check your credit report and dispute any mistakes you may find
Save for a Larger Down Payment
One of the best ways to secure lower interest rates for your mortgage is to save up for a larger down payment. While you might be tempted to put down the bare minimum, you may end up paying more in the long run. That’s because lenders will generally offer the best rates to borrowers who make a larger down payment since the lender will be carrying less risk in case you default.
Gather Info on Your Income and Employment History
Lenders will typically want to see two consecutive years of steady employment and income to ensure that you can afford your mortgage payments and repay the mortgage over the long haul. If you’re a salaried employee, the lender will ask for W-2 forms and federal tax returns for the past two years to verify your income. They’ll also check with your employer to confirm how long you’ve worked there. Typically, steady employment and income sources show you can be able to repay the loan, and hence lenders will offer better interest rates and loan terms.
Note: If you’re self-employed, you need to provide federal tax returns for two years, as well as a signed statement from an accountant, a profit and loss statement, and other documentation showing sufficient business income.
Shop Around for Mortgage Lenders
When searching for a mortgage, ensure that you contact several lenders. Mortgage bankers, regional banks, national banks, and local credit unions might all offer different mortgage products, each with their own rates and fees. Some mortgage lenders can cater to new homeowners or first-time homebuyers, while others are better for refinancing. So, consider your choices carefully and take your personal financial situation into account when choosing a lender.
Also, since mortgage rates can change frequently, try to contact different lenders on the same day and around the same time to truly compare the rates. Also, factor in any associated fees and costs when calculating potential savings and get the right deal for your needs. In fact, a study has shown that borrowers can save $1,435 on average by getting just one additional rate quote and about $3,000 on average by getting five quotes.
Consider Other Mortgage Types and Terms
If you’ve found a long-term home and have excellent cash flow, consider a 15-year fixed-rate mortgage, instead of the conventional 30-year fixed-rate mortgage. You’ll have to pay more every month, but you’ll pay off your home sooner, and you’ll pay less in interest since 15-year mortgage interest rates fall below other mortgage options.
Alternatively, you may want to consider an adjustable-rate mortgage (ARM). With ARM, you’ll start off with a fixed rate for the first stage of your mortgage (usually 5-7 years), which is generally lower than what you’d get with a fixed-rate mortgage. After the period expires, you’ll be switched to an adjustable rate, meaning the rates can either go up or down. If the rates fall, you can refinance an ARM into a fixed-rate mortgage.
Finally, you can check if you’re eligible for government-insured mortgages, including:
- VA loans: If you or your spouse have served in the military, you could be eligible for a VA loan. In many cases, there’s no down payment required, but your lender may require one if you have a lower credit score.
- FHA loans: Insured by the Federal Housing Administration, FHA mortgages are favorable to first-time homebuyers since the minimum down payment and credit score requirements aren’t as high as they are with conventional loans.
- USDA loans: The USDA mortgage program is designed to help low- and moderate-income borrowers in rural areas buy homes. There’s no down payment required, but your home must be in an eligible area.
Ready to Own a Home? Contact Us!
Buying a home could be the largest and most important financial decision of your life, and you’ll most likely need a mortgage to finance the purchase. The above-mentioned tips can help you secure a lower interest rate for your mortgage. For more information about mortgages and the overall homebuying process, call our experts today!
