Landing the best mortgage rate requires tactical shopping and research. To help you find the best rate, we’ve done some of the research for you below. With this background, you’ll be much better prepared to score the best home loan.
Increasing your credit score is the most direct path to the lowest interest rate. You’ll save thousands of dollars in interest over the term of your mortgage if you start with a high credit score.
How do you boost your score? Take these steps now:
- Pay down your credit cards: Using a high percentage of your available credit will put a dent in your score. For best results, it’s recommended that you use 30% or less of your available revolving credit.
- Pay your bills on time. If you have any 30-day late dings on your credit report, ask if the creditor will consider removing them.
- Don’t apply for many credit accounts. The more accounts you apply for, the lower your score. Keep your credit applications to a minimum when you are involved in the mortgage approval process.
Home Price and Loan Amount
Many consumers don’t know that the property’s price and the loan size affect the rate. There are three categories of home loans:
- Conforming loans: mortgages of $424,000 or less
- Super-conforming: For people who reside in expensive regions, mortgage loans may be as high as $636,150 and still qualify as a conforming loan.
- Jumbo: Loans that are higher than conforming and super-conforming limits
Conforming loans usually have lower rates than super-conforming or jumbo loans. If you want to score the lowest rate, get a lower mortgage that falls under the conforming guidelines.
Expensive areas, such as Seattle and San Francisco, may qualify for super-conforming loans, which will have lower rates than jumbo mortgages. Buying in a more rural region also can get you a lower interest rate.
Lenders reward a borrower who offers lower risk. People who put more money down are a lower risk to the lender because they have placed more of their own money at risk.
Consumers are more likely to keep paying a loan if they have committed 20% down rather than only 5%. So you can expect a lower interest rate if you can advance at least 20%.
You can usually get loans with as little as 3% or 5% down but expect to receive a higher interest rate.
Lenders may lower your rate when you reduce their risk. So getting a 15-year loan will net you a lower rate than a 30-year loan.
Also, you pay a lot less interest on a 15-year loan. Of course, your interest rate isn’t the only consideration when choosing a 15-year or 30-year loan, but it can be a significant factor.
Fixed or Variable Rate
Whether you have a fixed or variable loan affects the rate. A variable rate loan usually starts at a lower rate for the first few years. It may rise when the introductory period is over.
An adjustable-rate loan can be a smart choice if interest rates are going down. It also may work well for you if you intend to sell the property before the fixed term expires.
Today, there are many mortgage types, including FHA, VA, USDA, and other options. All of these loan products have particular requirements and terms, and their mortgage rates can also vary as well.
Some are designed for lower-income borrowers. To qualify, you’ll need to meet their income requirements, but if you do, you might lock in a very low rate.
If you cannot meet the income standards, your best bet could be conventional loans with 3% or 5% down. FHA loans can also be a good deal if you have a lower credit score.
FHA mortgages are government-backed, so the interest rates are low. So if you want to get the best interest rate, here’s an ideal array of conditions:
- Have a credit score of 740 or higher.
- Get a conforming loan.
- Live in a reasonably affordable area, so you can have a mortgage that isn’t too big.
- Put down 20% or more.
- Get a 15-year mortgage.
- Opt for a variable interest rate.
- Choose a conventional loan, unless an FHA loan can get you a lower rate.
If you can check all these boxes, you’ll score a low rate. Even if you can’t do all of them, try for most, and you’re still likely to save a lot in interest charges.