Getting the best mortgage rate isn’t just a part of the home buying process, it’s a money saver. A lower rate will save you thousands over the life of the loan. With so many factors to consider, you need to know how to navigate the process. Here are 20 tips and tricks to get the best mortgage rate possible and save big.
Understand How Mortgage Rates Work
Before we get to the tips, you need to understand how mortgage rates are determined. Lenders set rates based on the current economic environment, inflation and the Fed’s policies. Your credit score, loan amount and down payment also play a big role in the rate you get. This will help you make informed decisions when you apply for a mortgage.
Check Your Credit Score Early
Your credit score is one of the biggest factors in determining your mortgage rate. The higher your score, the lower your rate. Check your credit score several months before applying for a mortgage to make sure it’s accurate. This will give you time to fix errors and improve your score if needed.
Improve Your Credit Score
If your credit score can be improved, do so. Pay off outstanding debts, don’t open new credit accounts and make all your payments on time. Even a small bump in your score will get you a better mortgage rate.
Compare Multiple Lenders
Different lenders offer different rates, so you need to shop around. Get quotes from at least 3 to 5 lenders. Compare the rates, terms and fees of each offer. This will give you a clear view of your options and help you choose the best rate.
Consider Different Loan Types
Mortgage rates vary depending on the type of loan you choose. Fixed rate mortgages have higher rates than adjustable rate mortgages (ARMs) initially but offer stability. ARMs have lower rates to start but can increase over time. Consider your financial situation and how long you plan to stay in your home before deciding.
Put More Down
The more you put down on your home, the better your mortgage rate will be. A bigger down payment reduces the lender’s risk which can mean a lower rate for you. Aim for at least 20% down to avoid private mortgage insurance (PMI).
Pay Points
Mortgage points are fees you pay upfront to lower your rate. Each point is 1% of your loan amount and can get you 0.25% lower rate. If you plan to stay in your home long term, paying points will save you a lot over the life of the loan and will be a bright financial future.
Lock it in
Once you’ve found a rate you like, lock it in. Rates can change daily and locking in ensures you get the rate you were quoted, even if rates go up before you close on your home. Just be aware of the fees associated with rate locks and the length of the lock period. Lock periods are usually 30-60 days but some lenders offer longer or shorter lock periods. If rates are going up, a longer lock period might be good. If rates are going down, a shorter lock period might be better.
Keep your DTI low
Lenders look at your debt-to-income (DTI) ratio to see how well you can repay your loan. The lower your DTI, the better your rate. To lower your DTI, pay down existing debt and don’t take on new debt before applying for a mortgage.
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Choose a shorter loan term
Shorter loan terms usually have lower rates. While your monthly payments will be higher with a 15-year mortgage vs a 30-year mortgage, you’ll pay less in interest over time. If you can afford the higher payment, a shorter term could save you money in the long run.
Watch the market
Mortgage rates can change based on economic conditions. Keep an eye on the news and trends to know when to lock in a rate. For example, if the Fed is going to raise rates, you might want to lock in before they do.
Consider an ARM if you’ll move soon
If you’ll be moving or refinancing in a few years, an adjustable-rate mortgage (ARM) might be a good choice. ARMs have lower rates for the initial period which can save you money in the short term. Just be aware rates can go up after the initial period.
Use a Mortgage Broker
A mortgage broker can help you find the best rates by comparing offers from multiple lenders. Brokers have access to loan products that may not be available to everyone. Just ask about their fees and how they are compensated.
Don’t make big changes
Lenders like stability. Avoid making big changes, such as job changes or large purchases, before and during the mortgage application process. These can affect your credit score and debt-to-income ratio and could result in a higher rate.
Read all the fine print
The rate isn’t the only cost of a mortgage. Make sure to read all the fees, including origination, appraisal and closing costs. Some lenders may offer lower rates but charge more fees so consider the total cost of the loan when comparing offers.
Refinance
Refinancing mortgage could get you a lower rate if you already have a mortgage. Refinancing means replacing your current loan with a new one, ideally at a lower rate.
But consider the costs of refinancing, like closing costs to see if it’s worth it.
Keep a Stable Job
Lenders like borrowers with a stable job history. If possible, don’t change jobs during the mortgage application process. Consistent income over a long period makes you a more attractive borrower and can get you a lower rate.
Understand Private Mortgage Insurance (PMI)
If your down payment is less than 20% you’ll need to pay PMI. PMI adds to your monthly mortgage payment and overall loan cost. To avoid PMI, try to put down at least 20% or consider a piggyback loan. A piggyback loan is a second mortgage you take out at the same time as your first mortgage. It covers part of the down payment so you can avoid PMI. But be aware the interest rate on a piggyback loan is usually higher than the rate on your primary mortgage.
Ask for a Rate Reconsideration
If you like the rate a lender offers you, don’t be afraid to ask for a reconsideration. Provide proof of a better offer from another lender or highlight any improvements in your financial situation that justify a lower rate. Lenders will negotiate to keep your business.
Plan Ahead
The best time to start planning for a mortgage is before you start house hunting. Improve your credit score, save for a down payment and research lenders. The more prepared you are the better your chances of getting a good rate.
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Conclusion
Getting the best rate takes preparation, research and a little bit of negotiation. Follow these 20 tips and tricks and you’ll increase your chances of getting a rate that saves you money over the life of the loan. Remember even a small difference in your rate can add up to big dollars over time. So shop around, know your options and make informed decisions.
This will get you the best rate and long term benefits as you move forward with your home purchase.
