Securing the best mortgage rates can significantly reduce your monthly payments and total loan repayment. James Marchese, CEO of Mortgage Now Inc, joins us to share his best tips on how to get the best mortgage rates.
To understand how to get the best mortgage rates, you first need to understand lenders’ attitudes towards risk. For lenders to mitigate the risks that are involved in lending large amounts of money, they need various tools at their disposal. And mortgage interest rates are just one of them.
Generally, the higher the chance that a borrower won’t meet their obligation, the higher the interest rate on the loan. So, to get the best mortgage rates, lenders need to present themselves as lower risk. Fortunately, there are a few ways to do that.
Lenders break loans up into Prime, Alt-A, and subprime mortgages. The best rates are afforded to prime mortgages. To apply for these rates, lenders will look for a:
- Credit Score of 670 or higher
- Debt-to-income (DTI) ratio of lower than 36%
- Consistent earnings over the last two years
- A significant downpayment
If you want to capitalize on the best mortgage rates, it’s advisable to reduce your debts, get your credit score up, and for many lenders, have a down payment of around 10-20% of the price of the home.
Of course, not everyone is in a financial position to apply for a prime mortgage successfully. But, to get the best rate for you, the general principles above will still apply.
Here are five tips that you can use to secure the best mortgage.
#1. Consider a Shorter Mortgage Term
The longer the mortgage, the higher the chance of defaulted payments. Therefore, many mortgage lenders are prepared to offer a lower interest rate if you reduce the loan term. If you feel confident that you can meet the monthly payments, a 15 or 20-year mortgage will result in lower interest payments.
#2. Apply to Several Lenders
Applying to several different lenders means you can choose based on their loan estimates. Mortgage lenders compete against each other for business, so some may make you an interesting offer depending on their circumstances.
#3. Pay Discount Points
If you lock in a reasonable rate that you plan to keep for a while, paying discount points is a smart move. Each point costs about 1% of the loan. So, for example, on a $400,000 mortgage, 1 point is $4000. Depending on the lender and market conditions, each point could shave 0.25% off your interest rate.
#4. Keep an Eye on Mortgage Rates
While your credit score and downpayment amount are within your control, several outside factors like the economy, unemployment figures, interest rates, the Federal Reserves’ monetary policy, etc., affect mortgage rates.
Keep an eye on mortgage interest rates, and be prepared to lock in a favorable rate.
#5. Review Your Credit Score and Reports
Borrowers have several options available to them if they want to check their credit reports. Experian.com offers free credit reports and FICO scores when you sign up. Additionally, they also provide a service that helps to boost your credit score by adding utilities such as Netflix. This service won’t turn a 580 score into a 670, but every point counts.
Additionally, reviewing your credit score can highlight any mistakes or inaccuracies that are lowering your score. Fixing these errors could make you eligible for a more favorable rate.