5 Tips To Get The Best Mortgage Rate On Your Home

When you find your dream house, you’d naturally want to make a solid offer to the seller and close the deal as soon as humanly possible. After all, you wouldn’t want anyone else swooping in. Now, in your hurry, you may not give much thought to the terms, such as the mortgage rate, of your home loan. And this can prove to be an expensive mistake. It’s because even a small difference (of say, 0.5%) between two percentage points can have a significant impact on your overall interest amount. As such, you might end up paying a few thousand dollars extra over the loan period.

This is why you should follow a few tips to get the best mortgage rate on your home. Something as simple as reaching out to various creditors and comparing their terms can allow you to negotiate favorable terms and save your future self a large sum of money. Consciously working on improving your credit score will help, too.

Moreover, if possible, try to make a larger down payment (20% is optimal) than you’d initially planned. The logic is simple: A smaller principal loan amount will automatically lead to a lower interest overall. A bonus advantage is you won’t have to worry about an extra expense that can sneak up on you while buying a home: the private mortgage insurance (PMI).

Further, researching the loan programs and types available will let you make an informed decision. Taking advantage of discount points is a good strategy as well. However, keep in mind that applying these tips will take time, so it’s best if you apply for a loan before finding a home.

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Reach out to various lenders so you can compare offers

While you’ll want to fast track the loan approval process, it’s best if you reach out to various lenders (try to prepare a list of at least three institutions) for maximum savings. Case in point, a 2023 Freddie Mac research found that borrowers who got a minimum of two rate quotes stand to save about $600 per year. And the savings doubled for ones who shopped around for four or more quotes. 

Though this will impact your credit score a bit, all queries within the 45-day window will count as one. So, contact various lenders during this period, and ask them to detail their mortgage rate (enquire whether it’s fixed or adjustable) and monthly payment for the same loan amount, type, and term. Checking in with an online service can be beneficial if you’re looking for lower rates. Your current bank may also offer a relationship discount.

Additionally, find out about the extra fees, such as loan origination or underwriting, and costs, like transaction, settlement, and closing, you’ll have to bear. Moreover, clarify if they use a broker or not. You want to be sure because these agents work for a fee, which is usually borne by the borrower. In case one is involved, ask if they’ll be compensated in “points” during closing. Or, will it get added to your interest rate?

In certain scenarios, they might be paid both. Also, ask an important question that can save you over $100,000: Is there a prepayment penalty? Once you have all the information, negotiate the best terms for yourself. Though you can ask the lender to lower the rate, concessions in the extra fees department can prove beneficial, too.

Improve your credit score to become eligible for lower rates

Your credit score directly impacts your mortgage rate. This is because lenders use it to determine your ability to repay the loan within the agreed-upon period. So, if you have a history of defaulting on your credit card bills or are deep in debt, you’ll naturally have a low credit score. This, in turn, will qualify you for higher rates. In case the score is too bad (below 580 for FICO), you might not even be eligible for a traditional home loan and have to reach out to a Federal Housing Administration (FHA) lender.

To qualify for better rates, try to maintain a FICO credit score between 740 and 850. Start by looking into your current score. Government-approved sites, like AnnualCreditReport.com, are free and you can request a report weekly without your credit score taking a hit. But remember that lending institutions might use other methods to calculate your credit standing, so your rate might differ than what you’re expecting. Once you have a rough idea, actively work toward improving it. 

The best way to do that is to always pay your bills and loan amounts on time. Additionally, don’t use your credit cards unless necessary and avoid maxing them out. While at it, don’t apply for more credit if you don’t need it, as this will tell a lender that you’re facing problems financially.

Moreover, don’t shut down your old accounts, even when you’ve settled them, since they can have a positive influence. Also, always pay attention to your credit report and point out fraudulent transactions to Equifax, Experian, or TransUnion. Lodge a complaint with IdentityTheft.gov if you suspect an identity theft.

Be prepared to make a substantial down payment

Though you can get approved for a home loan even if you pay a mere 5% as down payment, know that this will adversely impact your mortgage rate. This will be due to your loan-to-value (LTV) ratio being higher. In other words, the creditor would essentially be taking a higher risk by lending you the money, so the rate usually reflects this.

Worse, whenever your down payment is below 20%, you’ll have to deal with private mortgage insurance, or PMI. Aimed at protecting your lender’s interests, this is an additional cost that will get tacked onto your monthly payments. And the fee won’t be insubstantial, either. Be expected to pay anywhere between $30 and $70 extra per month on a principal of $100,000.

So, try to make a down payment of at least 20%, though a higher amount will lead to better savings in the long run. With that said, don’t clear out your emergency funds to be able to afford a substantial amount. You never know what exigencies might show up unannounced. Plus, your lender will probably check (during the underwriting process) whether you’ll have a bit of emergency funds leftover after making the down payment.

In case you can’t pay 20% or more upfront, the good news is you won’t have to keep paying PMI till the loan period. But the specifics will depend on your lender, so be sure to get this in writing before you pull the trigger. Opting for a shorter loan period (one with a fixed rate is better) will also have a favorable influence on your mortgage rate.

Become familiar with the loan programs and mortgage rate types available

There are government-backed loan programs you can avail of if you want a lower interest rate. For starters, an FHA loan doesn’t require a high credit score or substantial down payment. You can apply even if you have a score of 500, provided you can put down at least 10%. However, if your score is above 580, a 3.5% down payment will suffice.

Sadly, you can’t borrow a large amount or buy a luxurious property. You’ll also have to pay mortgage insurance both at closing (equal to 1.75% of the loan amount) and every month (between 0.45% and 1.05%). And if you don’t make a down payment of at least 10%, you’ll have to continue paying this till the entire loan amount is paid off. In case you did, you can stop after 11 years. Moreover, you might not find a lot of sellers who are willing to sell their property to a buyer with an FHA loan since it poses a high risk.

Other programs include a Veterans Affairs (VA) loan for veterans and their spouse as well as a U.S. Department of Agriculture (USDA) loan, provided you purchase a home in select rural and suburban neighborhoods. Both programs don’t have a set credit score or down payment requirement. Though lending institutions usually impose a limit.

As for mortgage rate types, there’s a fixed-rate structure wherein the interest rate remains consistent throughout the loan period. Another option is the adjustable rate that has a fixed rate (usually below the market rate) for the first few years. Then, it fluctuates on a set schedule, depending on prevailing market conditions.

Don’t overlook discount points if you want instant benefits

A sure shot way to bring down your mortgage is to invest in discount points. Basically, you pay a few thousand dollars — the same as 1% of the loan amount – for a point while finalizing the details. In return, this point knocks down your interest rate by 0.25% (but it can be less, too, depending on your circumstances). So, imagine if you’re borrowing $240,000 at a rate of 6%, you’d have to pay $2,400 upfront to bring the rate down to 5.75%. With an effectively low interest rate, you stand to save a good chunk of money over the loan period.

However, only opt for this option if you don’t plan on refinancing or selling the property anytime soon. This is because it’ll take you a few years to recoup the amount you pay for a discount point. It’ll take you far longer if you purchase more than one point. For example, if you paid $2,400 to save $40 on interest, it’ll take you 60 months (or, five years) to recover your initial investment amount. You’ll start reaping benefits thereafter.

When you refinance or sell the house, you’ll lose the cash you paid for the point(s). So, do a quick cost-versus-benefit analysis before you make a decision. Since this can put an extra burden on you (especially if you’re thinking of making a down payment of 20% or higher), you don’t want to take this decision lightly.

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