How to Qualify for the Cheapest Mortgage Rates

A low mortgage rate can mean savings tens of thousands of dollars over the term of your home loan. Getting the cheapest mortgage rates isn't a matter of simply asking, however. The best rates come when you meet the qualifications lenders prefer. Here are some tips for qualifying for the best home loan rates:

Manage Your Credit Score

When you apply for a home loan, your credit score will be one of the criteria used to judge you. Without an excellent credit rating, you might not receive the lowest available rate. Lenders provide you with the capital you need to make your home purchase, and they like to know that you are likely to repay the loan. In the financial world, a good credit score indicates a low default risk; lenders feel more comfortable with the idea that you will meet your obligation and they will get their money back. A higher interest rate is designed to help lenders offset default risk.

If you plan to apply for a mortgage, it's important to check your score well ahead of time. You have a different score, often based on the formula sold by FICO, with each of the three major credit bureaus. Obtain your scores, and review your credit report. Fix errors that might drag your score down.

Checking your credit score ahead of time can also help you identify trouble areas and work to fix them. Pay your bills on time and reduce your level of debt, and your credit score will improve to a point that might allow you a better shot at the cheapest mortgage rates.

Make a Bigger Down Payment

A larger down payment can help you qualify for lower rates, as well as save you money on mortgage insurance. The bigger your down payment, the smaller your loan. Additionally, when you have more "skin in the game," many lenders feel that you are more likely to do what it takes to make your loan payments and keep your home.

Not only can a bigger down payment help you get a better interest rate, but it can also help you save on payments because you might not have to pay any mortgage insurance. If you put 20% down on your home, typically you won't have to pay mortgage insurance premiums at all.

Choose a Shorter Loan Term

The cheapest mortgage rates are often associated with shorter loan terms. A 15-year loan usually has a lower interest rate than a 30-year loan. It is important to pay attention to other terms as well. A fixed-rate mortgage often comes with a higher interest rate than a variable loan. However, the variable loan can see a rate hike over time while a fixed-rate remains the same over the life of the loan.

There are some products, like hybrid ARMs, that feature a fixed rate at the beginning of the loan, but then become variable after a set period of time. In some cases, it's possible to get a mortgage that has a cap on how high the interest rate can go. Carefully research your options. Sometimes, a lower initial interest rate is offset by a higher rate later. Run the numbers to see what is likely to work best for your situation.

Pay Points

Another way to get the cheapest mortgage rates is to pay points. A point is equal to 1% of the purchase price of the home. So, if you buy a home for $150,000, one point would cost $1,500. Each point you pay up front lowers your interest rate a little bit. If you stay in your home for a long time, the interest savings can be worth the upfront cost. However, if you move within a few years of buying, the points you pay probably won't be worth the cost.

Your mortgage interest rate matters. Because a home loan is such a large commitment and is paid over such a long period of time, even a 1% change in your rate could mean a difference of tens of thousands of dollars. Plan now to qualify for the cheapest mortgage rates possible.

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