Mortgage rates are usually the first consideration when you're shopping for a mortgage. While mortgage lenders advertise their best rates, it can be challenging to qualify for those rates. However, these tips can help you gain traction toward getting your lowest mortgage interest rate. It's a good idea to get pre-approved for a mortgage before starting your home search; pre-approval lets home sellers know that you're serious and that last minute complications with loan approval won't cause your purchase offer to crash. Here's what you need to do before shopping for a home loan.
Lowest Mortgage Rates: Research and "Home-Work" Comes First
- Request and review your credit reports. Federal law allows you to request one free credit report from each of the three major credit reporting bureaus annually. Review your credit reports for accuracy and signs of identity fraud. Pay close attention to public records and addresses shown, as errors in these areas could indicate identity fraud or reporting errors.
- Order your credit scores. LendingTree offers free credit scores that can provide a baseline for what you need to do next. In general, mortgage lenders offer their best interest rates to applicants with credit scores of 740 or higher, and most require minimum scores of 620 or higher depending on the type of mortgage.
- Pay down consumer debt. If you have any past due payments on credit cards or student loans, now is the time to bring them current. According to MyFICO, your payment history accounts for 35 percent of your credit scores. Pay off as much consumer debt as possible to lower your debt-to-income ratio and potentially qualify for better rates.
- Determine how much you can afford to pay for a home and mortgage. The Consumer Financial Protection Bureau advises that a debt-to-income ratio of 43 percent is the maximum allowed, according to qualified mortgage rules used by most lenders. To estimate your debt-to-income ratio, add up the total of your mortgage payment, including taxes and insurance, and your minimum monthly payments on consumer debts. Divide the total by your gross monthly income. The result is expressed as a percentage. A low debt-to-income ratio can help you qualify for better mortgage rates.
- Budget for your down payment and closing costs. You can save money by having cash on hand for your down payment and closing costs. Conventional lenders typically require 20 percent down; otherwise you'll incur the cost of private mortgage insurance premiums, which are added to your monthly payments. VA loans require no down payment, but you'll have to pay a one-time loan guaranty fee and closing costs. FHA mortgages require as little as 3.5 percent down, but you'll be charged a higher upfront mortgage insurance premium at closing and will pay annual FHA insurance premiums as part of your mortgage payments. If you can avoid paying private mortgage insurance or FHA mortgage insurance premiums, you'll have more cash available for prepaying your mortgage. Make as large a down payment as you can afford and pay closing costs in cash to save on mortgage interest paid over time.
Match Your Mortgage to Current and Future Goals
- Consider an adjustable-rate mortgage. Knowing your housing needs, financial circumstances and future goals may help you save on mortgage interest. For example, if you're buying a starter home and plan to move to a larger home in a few years, you might want to consider a hybrid adjustable-rate mortgage that offers an initial low fixed rate for a specified number of years. After the initial period, a hybrid loan becomes adjustable. Watch for prepayment penalties on adjustable-rate loans if you use this strategy.
- Take out a 15-year mortgage. If higher monthly payments aren't an issue, 15-year mortgages have lower mortgage rates and provide significant savings on interest paid over the loan term. This can be a sweet solution if you want to retire mortgage-free sooner than later.
Tips for Comparing Mortgage Quotes
- Compare discount points. One point is equal to one percent of your mortgage loan amount. Lenders charge points to "lock in" a low interest rate for a specific period and may also charge points to secure a lower interest if your credit is less than perfect. Check mortgage quotes for points charged as lenders may offer lower interest rates and charge higher points. Others may quote mortgage rates without points and some lenders may provide scenarios with points and without.
- Avoid loans with prepayment penalties. A prepayment penalty is a fee charged if your mortgage is paid off prior to a specified date. Always verify that there is no prepayment penalty for any mortgage you're considering.
- Take notes and ask questions and negotiate. Make note of questions as you review mortgage offers and contact lenders for answers. Discuss your needs with several loan officers to find a great lender along with low mortgage rates. Remember to negotiate terms if you have multiple mortgage quotes that are very close in terms.
Taking time to review your finances, address credit challenges and shop for your best mortgage interest rate can reward you with savings on mortgage interest when you buy a home and in years to come.