How to Get the Best Mortgage Rate
If your time has come to buy a home, make absolute sure you are prepared to handle all the responsibilities owning a home requires.
This includes repairing any damages, keeping your home well maintained and handling a wide variety of expenses such as closing costs, insurance and policy fees, maintenance repairs and much more.
Because there are countless expenses a home acquires, many people take out a mortgage loan to help finance their property.
Odds are, majority of people do not have $300,000 or so dollars lying around to spend all at once.
Which is why people team up with mortgage lenders for financial mortgage assistance.
Before your lender helps fund your mortgage, they need to appropriately evaluate you before they agree to lend a couple thousand dollars.
How does my lender evaluate me?
When you apply for a mortgage loan, you are evaluated by your lender of your eligibility for a particular loan and interest rate.
Your lender will analyze your credit score, employment history, debts and other factors to accurately determine what they can offer you.
Once your lender has reached a decision, they will inform you of what type of loan and interest rate you qualify for.
Everyone’s financial situation is different, so that means not all interest rates are the same. So, do not compare rates with family or friends because that will not accurately reflect what rates you are qualified for.
Because you are borrowing money from a lender, they require you to pay it back on a schedule (for example, a 15 or 30-year term) that you are comfortable with, plus interest.
Interest rates have the ability to rack up thousands of dollars, depending on what term you choose and your credit risk (AKA, the likelihood you are going to pay the loan back).
The bottom line: your mortgage interest rate is a big deal.
So, how do you get the best rate?
Here is how:
Improve your credit score
Simply, the higher your credit score is, the lower the interest rate will be.
Having a strong credit score proves to lenders that you are a low credit risk, which means, you are less likely to miss or not make payments.
In result, lenders will offer applicants a lower interest rate.
Opposed to people with low credit scores, lender will issue higher interest rates because of their unpredictability.
Did you know high interest rates have the ability to accumulate thousands of dollars of the course of your loan’s term?
Avoid paying more than you have to by strengthening your credit score to a more desirable number.
Unfortunately, what qualifies as “good” caries from lender to lender.
For a general rule of thumb, here is a chart of what is considered poor through exceptional:
- Poor: below 580
- Fair: 580 – 669
- Good: 670 – 739
- Very good: 740 – 799
- Exceptional: above 800
If you are looking for ways to improve your credit score, here are a few simple ways:
- Never miss a payment
- Pay in full and on time
- Pay off any debts (credit card, outstanding bills, etc.)
By incorporating these practices into your financial situation, you can gradually improve your credit score.
Sadly, your credit score does not improve over night. So, be patient and continue to keep yourself accountable of your finances.
If you are wondering what your credit score currently is, you can request a free credit report from the Annual Credit Report, or Experian, which allows people to obtain their report with no credit card information required.
Have a history of employment
Typically, lenders like to see applicants who have at least two years of employment from the same company.
This shows stability and a consistency of earnings.
Having this record under your belt will prove to your lender that you have a stable income and can financially handle a mortgage.
Some lenders require contacts for recommendation, and many of the times, applicants list their employer as a referral.
Utilizing your employer as a referral is encouraged because they can speak on behalf of your behavioral habits and ability to handle this type of responsibility from a professional standpoint.
This tactic can sway your lender to believe you are a qualified and reliable applicant.
In other cases, some lenders deny applicants they have under two years of employment. If applicants are unable to prove their employment history, how will lenders be able to safely assume they have a sufficient income?
If applicants can’t financially prove themselves, lenders will most likely not take the chance to lend money to a client that has no history.
Your down payment matters
Generally, you will be offered a lower interest rate when you put more money down for your down payment.
More commonly, lenders and financial advisors will encourage clients to put down 20 percent of the home’s market value.
The primary reason experts suggest clients to put down more is so that their monthly mortgage payments will be lower, and so will their mortgage rate and principle.
ID you decide you cannot afford to put down 20 percent of the home’s market value, that’s O.K. You can still purchase a home. However, be aware of the consequences.
One major setback when people put down less than 20 percent is that they are required to purchase private mortgage insurance (PMI), which is an additional insurance expense that only protects the lender if the borrower fails to keep up with payments.
However, depending on what loan you choose, will determine the minimum amount needed for a down payment. But, there are certain guidelines to be met in order to qualify.
For example, an adjusted-rate mortgage (ARM) loan requires a specific credit score to qualify, with the minimum being 620. This gives people the ability to put down as little as 10 percent.
As you can see, your down payment plays a vital role in the mortgage process, which is why you should understand its significance.
Because financing a home is the number one obstacle potential homebuyers face, the government and other organizations have created programs and grants to help buyers purchase their home.
Just like down payment guidelines, there are restrictions and specific rules to be met in order to qualify for these programs.
For example, there are first-time homebuyer grants and programs for people looking to finance their first home.
However, this ultimately depends on what state and what town you live in. Typically, cities and towns have housing aid information on their website, so check out if your targeted town offers this type of program.
What are some rate options?
Traditionally, people are drawn toward a fixed-rate mortgage because it offers affordability, flexibility and consistency.
Fixed-rate mortgages are the most common type of home loan because monthly payments are the exact same over the course of the loan. This also goes for the interest rate and principle.
People are attracted to fixed-rate mortgages because they will be able to accurately budget their expenses monthly without worrying about the payments changing.
Most lenders offer borrowers a 15 or 30-year term, which both offer a different set of pros and cons.
A 15-year loan term is appealing to borrowers who are looking to pay off their loan faster. Although borrowers have a shorter loan term, their monthly mortgage payments are higher. But, they pay a significant less amount of interest.
A 30-year loan term is appealing to borrowers who want an affordable and steady payment schedule. This option takes longer for borrowers to pay back, but, monthly mortgage payments are lower. However, borrower will pay a larger amount of interest compared to a 15-year term.
Deciding between these two rate options can be difficult, which is why your lender is here to help you.
They can help analyze your financial situation, credit history, debts and other factors to determine which loan term would suit you best.
On the other hand, borrowers also look at adjustable-rate mortgages (ARMs) as an option.
ARM’s offer the same loan terms as fixed-rate mortgages, however, it differs in one big way:
Interest rates can increase or decrease without warning during the life of the loan. This option is riskier because borrowers will never really know how much money will be required monthly for mortgage payments or interest.
An ARM’s interest rate is reflected off an index that measures the economy’s market and a margin that your lender sets depending on your down payment amount and credit score.
As you can see, there are big differences between a fixed-rate and an adjustable-rate mortgage. It is highly recommended to ask your lender for professional advice on which rate option would work best for you.