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How to Get the Best Mortgage Rate in 8 Steps

When you get a mortgage to buy a home, the interest rate is one of the most important features of your loan. The lower your rate, the more affordable your mortgage. That’s why it’s important to get your lowest interest rate possible and shop around with multiple lenders.

How to get your best mortgage rate

  1. Boost your credit scores
  2. Pay down debt
  3. Contribute more than the minimum down payment
  4. Choose the right loan type
  5. Consider your interest rate type
  6. Opt for a shorter loan term (if possible)
  7. Shop around with multiple lenders
  8. Use mortgage points to your advantage

How to get your best mortgage rate

As you shop for a mortgage, you’ll quickly learn lenders pay attention to specific aspects of your financial picture in determining your rate. There are several factors in your control that may help you qualify for the lowest mortgage rates. Here’s how to get your best mortgage rate and save money over the life of your loan.

1. Boost your credit scores

The higher your credit score, the lower your mortgage rate can get. Take a look at your credit reports and scores six months to a year before you plan to buy a home. You can pull one free credit report from each major bureau — Equifax, Experian and TransUnion — annually at AnnualCreditReport.com. Dispute any errors you find, make on-time payments and avoid applying for new credit or racking up additional debt.

You can also get your free credit score online through several sources, or pay for ongoing access to your credit reports and scores through platforms like myFICO. Lenders use your middle score, or the second-highest score, to help determine your mortgage rate, so it’s worthwhile to improve all of your scores. Generally, a credit score of 740 or above may qualify you for the lowest mortgage rates available.

2. Pay down debt

The amount of debt you have relative to your income may also impact your mortgage rate. Lenders pay attention to your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income used to repay debt.

Your DTI ratio should be at or below 43%. Keep your DTI ratio low by paying down all lines of credit to under 30% of your available limit, known as your credit utilization ratio. You might consider a temporary side hustle to earn extra money to help pay down debt faster, too.

3. Contribute more than the minimum down payment

You may qualify for a mortgage with a low or no down payment, but putting down more than the minimum can help you get a good mortgage rate. The more you put down, the less risky you are to lenders. It also means you’ll have a lower loan-to-value ratio (LTV) — the percentage of your home’s purchase price financed by the mortgage — and you may avoid mortgage insurance.

For example, if you borrow a loan from the Federal Housing Administration (FHA) and put down at least 10%, you’ll only have to pay mortgage insurance premiums for the first 11 years of your FHA loan, otherwise, you’ll pay it for the life of the loan. If you make at least a 20% down payment on a conventional loan, you’ll avoid private mortgage insurance altogether.

4. Choose the right loan type

The type of mortgage you choose may also affect whether you can get your best mortgage rate. A government-backed mortgage, such as an FHA loan or a loan insured by the U.S. Department of Veteran Affairs (VA), may have competitive rates, but there are additional fees to consider.

FHA loans have upfront mortgage insurance premiums and VA loans have an upfront funding fee — both of which are added to your closing costs. When you’re considering different loan types, pay attention to the annual percentage rate (APR), as it factors in all the costs of a mortgage, including the interest rate.

5. Consider your interest rate type

Should you get a fixed-rate or adjustable-rate mortgage (ARM)? ARMs tend to have lower interest rates for an initial period than fixed-rate loans, at least until the rate begins adjusting. For example, the average 30-year mortgage rate for loans with a fixed rate is 3.6%, while the average 5/1 ARM has a 3.28% rate, according to Freddie Mac’s latest Primary Mortgage Market Survey.

You should only choose an ARM if you plan to move within a few years. That’s because your mortgage rate can go as high as 5% above the beginning rate whenever it first adjusts, according to the Consumer Financial Protection Bureau. Otherwise, you’ll need to qualify for a refinance and pay closing costs to convert to a fixed-rate mortgage.

6. Opt for a shorter loan term (if possible)

One straightforward way to get a good mortgage rate is to go with a shorter loan term. The 30-year, fixed-rate mortgage is the most popular home loan, but it typically comes with a higher interest rate because of its longer repayment term.

Rates on 15-year mortgages tend to be lower than 30-year loans, but the monthly payments are significantly higher. Let’s look at an example, using a mortgage calculator for a $250,000 loan.

15-year loan term  30-year loan term 
Mortgage rate  3.04% 3.60%
Monthly payment (principal and interest) $1,731.27 $1,136.61

 

If you can afford the higher monthly payment, consider borrowing a 15-year mortgage. You pay off your loan in half the time and save thousands in interest.

7. Shop around with multiple lenders

Shopping around with three to five mortgage lenders can help you get your best mortgage rate possible and potentially save you thousands over the life of your loan. As you gather quotes, ask each lender to provide you with a worksheet that outlines your estimated borrowing costs. Compare mortgage rates, APRs, lender fees and overall closing costs.

You’ll also get loan estimates from each lender after you’ve completed a mortgage application, but keep in mind that they only last for 10 business days. If you don’t move forward with one lender within that time frame, you’ll have to restart the process. This means more credit inquiries that can hurt your credit scores.

8. Use mortgage points to your advantage

You can negotiate your mortgage rate by offering to pay mortgage points. Points allow you to buy down your rate, and each point is equal to 1% of your loan amount. If you’re getting a $250,000 mortgage, one point would cost you $2,500. For every point you buy, your mortgage rate could drop by as much as 0.25%.

 

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