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How To Get The Best Mortgage Rate: Expert Tips

6-Minute Read
Published on January 25, 2022
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When you’re ready to buy a home, qualifying for a mortgage with the best terms and lowest rate should be a top priority. Although current mortgage rates vary based on market conditions, you’re likely wondering how you can get the lowest and best rates available?

After all, why wouldn’t you seek out the best possible rate? A lower rate could save you thousands over the course of your loan. In this article, we’ll cover some of the best strategies for improving your finances, so that you can secure and enjoy the best mortgage rate for your future home loan.

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How To Get A Great Mortgage Rate

Before you start placing bids on prospective homes, you should consider a few aspects of the financing process. Mortgage lenders have certain requirements for their borrowers and the following information will help you land the lowest interest rate  when you apply for a loan.

Get Your Credit Score In Shape

It’s no secret that a good credit score can help you throughout the mortgage process. With a better credit score, you’re likely to receive offers with the best loan terms. Conversely, you’ll likely face a higher interest rate if you have a lower credit score.

With that in mind, making an effort to know, and if necessary improve your credit score, prior to applying for a mortgage is a good idea. Since a credit score indicates your creditworthiness to the lender, taking some time to get yours in shape can have a major payoff.

A few good ways to give your credit score the boost it needs are to get a secured credit card, become an authorized user on a credit card and pay your bills on time. Even a small improvement to your credit score could make a big difference.

If you don’t know your current credit score, you can get a free credit report through several providers, including the three credit bureaus: Equifax, Experian and TransUnion. Once you receive your report, take the time to thoroughly review your history and check for any unfamiliar entries or errors. If you do find any mistakes or typos, you can have them corrected by the bureau that ran the report.

Pay Down Your Debts

When you have a high debt burden, lenders may be unable to offer you the best mortgage rates. That’s because a lender will look at your debt-to-income ratio (DTI), which is the percentage of your income that you spend on monthly debt payments.

Lenders take your DTI into consideration when preparing a loan offer. If too much of your income is spent on current debt payments, you might struggle to afford your mortgage. Because of that, you’ll potentially be facing a higher mortgage rate.

If you have a high DTI, then you should take action and pay down your debts. The less debt you have on your books, the better. In most cases, the ideal DTI is 35% or lower. Keep that in mind as you build a strategy for debt repayment.

Save For A Bigger Down Payment

As you prepare for your home purchase, saving for a higher down payment can help in many ways. First and foremost, you’ll likely get a lower interest rate if you’re able to make a significant down payment. Lenders like to receive a large amount down on a mortgage as it shows that the homeowner is committed to paying off the loan amount and is less likely to default on their payments.

This extra measure means most financial institutions would be willing to give you a lower interest rate which can lead to smaller monthly mortgage payments. Plus, you’ll be able to avoid costly private mortgage insurance (PMI) if you put down at least 20%.

Depending on the type of mortgage you choose, putting down a larger amount for your mortgage can be a worthwhile investment and save you money in the long run. However, saving for a bigger down payment could delay your home buying dreams. Take a minute to weigh the advantage of a lower interest rate against the time you’ll need to save for a larger down payment.

Consider An ARM Or A Shorter Loan Term

The type of mortgage you choose and the term (or length) of the loan can affect your interest rate in a major way. If you decide to go with an adjustable rate mortgage (ARM) or short-term fixed-rate mortgage, you’ll likely enjoy lower interest rates.

Before you move forward with an ARM, make sure you understand how they work and can change over the life of the loan. With an ARM, the interest rate will adjust over time based on ever-changing market conditions. In most cases, the initial interest rate, or teaser rate, is set for a predetermined number of years. After that initial fixed-rate period, it will adjust for the remainder of the term. The downside to an ARM is that you might find yourself facing significantly higher interest rates later in the loan.

Another option is to pursue a shorter loan term for a fixed-rate mortgage. The most common option is choosing a 15-year versus a 30-year mortgage. With a 15-year term, you’ll typically find lower interest rates because the loan is for a shorter period.

Although the lower interest rate of a 15-year mortgage can be tempting, it will come with significantly higher monthly payments. If you can easily afford the higher monthly payment, then a lower interest rate may be worth it. If you want to build more flexibility into your monthly budget, a 30-year mortgage can provide a lower monthly payment, but you’ll most likely be facing a higher interest rate.

Think About Buying Mortgage Points

Mortgage points can offer a way to lower your interest rate with little effort on your part. It just requires some extra cash.

After receiving your loan application and giving you preapproval, your lender may ask if you’d like to purchase discount points for your interest rate. This can be a good option if you want to lower your rate without having to improve your credit score or pay a substantial down payment.

If you plan to own the home for decades with a long-term mortgage, points can save you thousands of dollars over the life of the loan. But, buying mortgage points isn’t always the best solution.

If you plan to live in your house for just a few years, then paying extra closing costs (mortgage points are considered a closing cost) is usually not the right move. Mortgage points always come with a break-even point in time, where you’ve reached total savings equal to the cost of the points. If you get another mortgage prior to the break-even point, the points won’t have saved you any money.

Research First-Time Home Buyer Programs

If you are a first-timer, you should research first-time home buyer programs available in your area. In many cases, you’ll find opportunities to secure a better interest rate through these programs. USDA, VA or FHA loans can make owning a home more affordable while offering additional flexibility compared to a conventional loan. Many of these programs can also give buyers with lower credit scores an opportunity to qualify for a low mortgage rate and purchase a home with a smaller down payment and closing cost assistance.

Thankfully, there are several first-time home buyer programs to choose from, so you’re bound to find one that benefits you. Nevertheless, it can be a challenge to figure out which program is right for your situation. If you need help, chat with our home loan experts to see what programs you may qualify for.

Compare Lenders

As with all loans, it’s a great idea to compare lenders before moving forward with a particular loan.

Taking the time to look at several different loan options allows you to fully assess interest rates and terms between lenders. You should also take the opportunity to ask your prospective bank or credit union questions about their services and the benefits of working with them.

Before you dive in with the lowest interest rate offered, make sure to also consider any upfront fees involved and past client experiences with the lender. Plus, decide if you’re comfortable with the lender’s communication style. All are important factors to consider before finalizing the loan.

The Bottom Line: Getting The Best Mortgage Rate Can Save You Money Over Time

The home buying process can be an exciting time that marks a new chapter in your life. Every borrower has different strengths and financial goals. You can implement strategies that are appropriate for your life, like improving your credit score, shopping interest rates, researching home buyer programs and comparing different lenders. These steps may seem like unnecessary chores, but the effort can pay off in the long run and save you money in the years to come.

Not sure how to get started? Speak with a Home Loan Expert to figure out your next steps in the process!

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.