If you can make a down payment above the minimum, you may be able to get a better rate.
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Your mortgage interest rate is based in part on how risky lenders consider you to be as a borrower.
Your credit score and credit report are vital for mortgage approval.
Your income compared to your debt obligations is another important part of getting a mortgage.
If you are looking to buy a home, you are likely preparing for the biggest purchase of your life. To finance a home purchase, many households look to a mortgage loan from a trusted lender. Mortgages make sense for millions of people.
When you get a mortgage, your mortgage interest rate can make a big difference in how much you pay each month. Here’s how you can keep your monthly costs as low as possible.
How to get a lower mortgage interest rate
1. Improve your credit
There are two main places a lender looks when approving a mortgage. The first stop is usually your credit report. If you are applying for the loan jointly with a spouse or other partner, it’s a team effort, so you should work with them on their credit, too.
The two biggest factors in your credit score are your payment history and account balances. Make sure to always pay on time and work to pay off any credit card and line-of-credit balances before applying for a new mortgage. It’s a good idea to take at least a six-month moratorium from applying for new accounts as well.
2. Optimize your debt-to-income ratio
As part of the loan approval process, also known as underwriting, the bank will look at all of your current debt payments. They will use your credit report to gather your minimum payments on every credit card, student loan, car loan, and other debt under your name on your credit report.
To decide if you can afford the mortgage, the bank will compare your monthly income to your monthly debt obligations. This is known as your debt-to-income ratio (DTI). If you can increase your income or pay down outstanding debts, you’ll have the best possible DTI when applying for your mortgage.
3. Shop around for the best deals
In addition to qualifying for the best rate on your own, you should pick a lender with the lowest interest rates. Just because you have your checking account at a bank down the road doesn’t mean they offer the best rates. The internet makes it easy to quickly compare the best rates.
When I bought my home in Portland, Oregon, I talked to two local lenders and one nationwide credit union. I found the best rate given my income and credit came from PenFed Credit Union, so that’s where I got my mortgage.
For my current home, I shopped around again and found that a California-based lender, New American Funding, had the lowest rate for my finances.
You have to shop around to get the answer for your unique situation.
4. Consider points and promotions
Some lenders offer discounts when you qualify or promotions for lower rates. Also, look at federal or state programs and loan programs from the VA, FHA, and other government loans if you are eligible. If you’re not sure, talk to a prospective lender or mortgage expert to learn more.
Points are a way to lower your interest rate by making a cash payment up front. Points can save you money in some cases, but the math doesn’t always add up. Try out a mortgage calculator that supports points to decide if it’s a good deal for you.
5. Make a larger down payment
The larger your down payment, the more skin you have in the game. This makes you less of a risk in the eyes of the lender, and you’ll likely be able to get a lower rate as a result.
Saving up for a down payment can take a long time, but you don’t necessarily need to have a full 20% down to reap the benefits of a larger down payment. Typically, borrowers need to put at least 3% down on a conventional loan. If you can bring more than that to the table, you may be rewarded with a slightly better rate.
Small savings on a big loan add up fast
For a savings account with a $1,000 balance, the difference of a 0.25% interest rate isn’t that big of a deal. But for a mortgage with a six-figure balance and 30-year payback period, a quarter of a percent is huge.
When it comes to the biggest purchase of your life, even a small interest rate savings can be worth tens of thousands of dollars. Using these steps, you can find the lowest possible interest rate for your finances.