Out of all debt payments that you may have on the books, a mortgage payment will likely be one of your biggest. After all, mortgages are taken out to pay for real estate purchases, which are hefty expenditures. Thanks to mortgages, however, consumers across the country have the ability to make these large purchases that they may otherwise not be able to afford.
But the overall cost of a mortgage can be directly affected by the interest rate charged. When rates are low, mortgages are much more affordable, while the opposite is also true when rates spike.
Right now, rates are still somewhat low compared to what they have been in years past. In fact, since the housing crash in 2008, mortgage rates have hovered near historic lows for years, though they are now starting to creep back up.
While there is little that buyers can do about the posted mortgage rate, there is still a lot that can be done to keep the rate that lenders offer as low as possible.
Here are some ways to help you get a low-interest rate on your mortgage that can help you save thousands of dollars over the life of your loan.
Much like you would comparison shop before purchasing any goods, you’ll want to do the same with a mortgage in order to get the lowest interest rate. Taking the time to compare what different lenders are willing to offer can really save you thousands of dollars over the life of your mortgage. Even a fraction of a percent can make a huge difference in how much you end up paying.
You may also want to consider working with a mortgage broker who will do all the comparison shopping for you. That way you only have one loan application to fill out, and your mortgage broker will take that information and look around from their network of lenders to see who is willing to offer the lowest rate and best mortgage terms.
Give Your Credit Score a Boost
A huge factor that comes into play in terms of the interest rate offered to buyers is credit scores. Generally speaking, the higher the credit score, the lower the interest rate, and vice versa. If your credit score is anywhere over 760, you will likely get the lowest rate possible. But if your score is less than 650, you’ll probably wind up with a much higher rate, which will make your mortgage a lot more expensive.
Buyers with high credit scores present a much lower risk to lenders because they will be more likely to make their mortgage payments on time. Those with low scores, on the other hand, are perceived as a higher risk. And in order to hedge against this elevated risk, lenders tend to charge low-credit borrowers a higher interest rate.
Giving your credit score a boost is a great way to ensure a lower interest rate when you’re ready to apply for a mortgage. If your score could use a little improvement, consider taking the following steps:
- Pay all your loan bills on time
- Don’t spend any more than 30% of your credit card limit
- Don’t apply for any additional loans or lines of credit
- Have any errors on your credit report fixed
- Pay down your debt
Boost Your Down Payment
The more money you’re able to put towards your home purchase, the better in terms of the type of interest rate you may be able to get. Making a higher down payment can effectively reduce the amount of money you need to borrow and will also reduce your loan-to-value ratio (LTV), which is a measure of the loan amount relative to how much the property is valued at. A lower LTV is viewed more favorably by lenders, who will often reward borrowers by offering a lower rate.
Not only can you decrease the interest rate charged to you, but you can also save more money by not having to pay Private Mortgage Insurance (PMI). This type of insurance premium is charged to borrowers who put less than a 20% down payment towards their mortgages. If you can come up with at least 20% of the purchase price of your home, you can avoid having to pay these extra fees.
Pay Down Your Debt
The amount of debt you carry relative to the income you bring in will have an impact on the interest rate your lender offers you, as well as your overall ability to secure a mortgage at all. If you carry a lot of debt, adding another debt to the pile might overburden your finances.
Lenders will look at your debt-to-income ratio (DTI) to assess your current debt relative to how much money you make. If your income is barely enough to cover your current financial obligations, then your lender may not approve your mortgage application. If your application is approved, you may be subject to a much higher interest rate.
Ideally, lenders like to see DTIs no higher than 36%, though 43% has often been the acceptable limit. If you’re looking to get a lower interest rate on a mortgage, work diligently to pay down your debt and inevitably reduce your DTI.
Ensure Steady Employment
For obvious reasons, lenders prefer to work with borrowers who not only make a decent income but are steadily employed. Having a permanent full-time job is safer than a contract position. Ideally, you should be able to prove steady employment for a minimum of two years. The longer, the better.
If your employment past shows sporadic periods of unemployment over recent years, you’ll be hard-pressed to not only snag a low-interest rate but get approved at all. If time is on your side, get your employment situation in order to boost the odds of securing a mortgage at a relatively low-interest rate.
Consider an Adjustable-Rate Mortgage
If rates are expected to stay low over the next two to five years, then an adjustable-rate mortgage might be a good way to get a lower interest rate. These types of mortgages come with a low-interest introductory period, which usually lasts anywhere between two to five years.
The rates offered during this period are typically lower than those with fixed-rate mortgages, which is why they’re often an attractive option for borrowers.
But once this introductory period is over, the rates will usually increase. Adjustable-rate mortgages are therefore ideal for those who either have an appetite for risk of rates increasing or who may have intentions of selling their home before the introductory period ends.
Lock in a Low Rate
If it’s anticipated that rates are expected to increase over the next little while, it may be worth it to go with a fixed-rate mortgage instead of an adjustable-rate mortgage. With a fixed-rate mortgage, you have the opportunity to lock in a lower rate and hedge against an increase in mortgage rates over the near future.
You can even ask your lender to lock in the rate sooner rather than later – even while your mortgage is being processed – in order to make sure the rate stays put. Your lender might charge you a fee for this, but it might be worth it if you have reason to believe that the rate you’ve been quoted is likely to increase soon.
The Bottom Line
If there’s any way for you to knock even a fraction of a percent off your mortgage interest rate, you can effectively save yourself a ton of money in mortgage payments. Luckily, there are plenty of things you can do to help ensure that you’re offered the lowest rate possible. Consider working with a mortgage specialist who will be able to guide you throughout the mortgage process and make recommendations of what you should do to put you in the best position to snag a low-interest rate on your mortgage.