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How to Get the Best Mortgage Rate in 10 Steps
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If you’re buying or refinancing a home, your mortgage interest rate is one of the most important features of taking out a home loan. Here’s how to get the best mortgage rate in 10 steps.
1. Check your credit scores
Your credit score has more impact on getting a low-rate mortgage than any other factor. You can start by getting one free credit report from each major bureau — Equifax, Experian and TransUnion — at AnnualCreditReport.com.
Although you can also get your free credit score online through several sources, or pay for ongoing access to your credit reports and scores through platforms like myFICO, ultimately your lender will pull a mortgage credit report and use your middle score, or the second-highest score, to help determine your mortgage rate. Generally, a 740 credit score or higher may qualify you for the lowest mortgage rates available.
2. Work on boosting your credit score
Once you have a starting point for where your scores are now, you can take steps to improve them if you’re not quite at the 740 level yet. Dispute any errors you find, keep making on-time payments and avoid opening any new credit accounts before applying for a mortgage.
Besides your payment history, your “utilization rate” has the most impact on your credit scores, and maxed-out credit cards will sink your scores quickly. Keep your credit card balances low or pay them off completely, if possible.
3. Pay down your debt
Clearing out credit card balances can directly impact your credit scores and get you a lower mortgage rate. However, paying down other debt may also have a big impact on another very important factor lenders consider for loan approval: your debt-to-income (DTI) ratio.
Your DTI ratio divides your total debt by your gross income, and lenders typically set the maximum DTI ratio at 43%. For example, if you earn $5,000 per month before taxes, your path to loan approval will be easier if your total debt (including your new mortgage payment) is $2,150 or less.
4. Make a bigger down payment
You may qualify for a mortgage with a low or no down payment, but putting down more than the minimum can help you get a good mortgage rate, especially if you have a low credit score. The more you put down, the less risky you are to lenders. A higher down payment also reduces your loan-to-value (LTV) ratio — the percentage of your home’s purchase price that is financed by the mortgage — and you may avoid or reduce your monthly mortgage insurance payment.
For example, if you make at least a 10% payment on a loan backed by the Federal Housing Administration (FHA), you’ll pay FHA mortgage insurance premiums for only 11 years, versus paying them for the life of the loan with the minimum 3.5% down payment. If you make at least a 20% down payment on a conventional loan, you’ll avoid private mortgage insurance altogether.
5. Consider a shorter loan term or ARM
One way to get a lower mortgage rate is to choose a shorter term to pay off your loan. While many homeowners prefer 30-year fixed-rate mortgages for their lower payment, the rates are higher than a shorter term, like a 15-year fixed-rate mortgage. However, because you’re paying your loan off in half the time, you’ll spend much more on your monthly payment.
It may be worth it to check out an adjustable-rate mortgage (ARM) if 30-year fixed-rate loans are on the rise. An ARM offers a lower mortgage rate for an initial period that usually ranges from three to 10 years, and then it adjusts annually based on the terms of the loan you choose. ARMs are a good fit if you need temporary savings and plan to sell or refinance your home before the rate changes.
6. Pick the best loan program
The loan program you choose may also affect whether you can get your best mortgage rate. If you have low credit scores, a government-backed mortgage, such as an FHA loan or a loan insured by the U.S. Department of Veteran Affairs (VA), may have more competitive rates, but you’ll pay additional mortgage insurance and fees.
When comparing government loan programs to conventional loan programs, pay attention to the annual percentage rate (APR), as it factors in all the costs of a mortgage, including the interest rate. FHA loans have upfront mortgage insurance premiums (UFMIP) and VA loans have an upfront funding fee — both of which are added to your closing costs.
The table below provides a quick overview of how to match your finances to the lowest rate:
|Loan program||Best for the lowest rate if:|
|Conventional||You have high credit scores and are putting down less than 20%|
|VA||You're an eligible military borrower with no down payment|
|FHA||You have credit scores below 700 or don’t qualify for conventional or VA financing|
7. Decide whether paying mortgage points makes sense
You can negotiate a lower mortgage rate by offering to pay mortgage points. Each point is equal to 1% of your loan amount. If you’re getting a $300,000 mortgage, one point would cost you $3,000. Your mortgage rate could drop by as much as 0.25% for every mortgage point you buy.
8. Shop, shop, shop
A recent LendingTree study found nearly half of the mortgage borrowers who compared rates saved money. Contact at least three to five lenders and compare loan estimates on the same day (rates change daily) to collect the best mortgage deals from each one. Compare loan closing costs and interest rates, and haggle for the best deal. Try a rate comparison site to have lenders call and compete for your business.
9. Lock in your mortgage rate
Once you’ve picked the best lender for you, lock in your mortgage rate. A rate lock is a commitment to the interest rate you’ve been quoted, and the rate shouldn’t change unless your credit score, down payment or loan program changes. With a refinance, your rate might change if your appraisal comes in low.
Keep an eye on your lock expiration date — if you haven’t closed by that date you may end up paying costly lock extension fees.
10. Don’t make changes before closing
Lenders continue to vet your finances up until the day you close. Don’t change jobs, open new credit accounts or forget to pay any of your debts during the loan process. Any of these homebuying mistakes could result in a higher rate, or worse, a loan denial.