Locking in the best mortgage rate is important because the rate you get affects the monthly mortgage payment you make. If more of your hard-earned cash goes toward interest payments, you have less to spend on your dream home. It makes sense to spend some time learning how to land the best possible mortgage rate when you buy a new home. Once you understand the basics, your real estate agent can put you in touch with a mortgage broker who will provide you with loan quotes from a variety of lenders.
Getting the Best Rate
There are steps you can take to make your financial picture more attractive to lenders to get a favorable mortgage rate. Check out your credit score at the three main credit bureaus – Experian, TransUnion, and Equifax. People with the best credit scores generally get the lowest interest rates. As a rule of thumb, if you find out that your credit score is below 700, increase your score by paying your bills on time and straightening out any errors. Pay down your debts like credit cards, car payments, and student loans to lower your debt-to-income ratio. You can also put down 20 percent of the cost of the home to get the lowest interest rate, although some lenders may give you a favorable rate with less of a down payment.
Homebuyers may have the option of paying mortgage discount points to lower their interest rate. Deciding whether or not to pay points usually depends on how long you plan to stay in the house. If you plan to remain for many years, purchasing points to lower your interest rate over the course of the mortgage can work to your advantage. Mortgage points are paid at closing and are equal to one percent of the purchase price of the home. The lender agrees to lower your mortgage interest rate by one percent for every point you purchase, generally up to four percent. You will pay more upfront at closing, but paying points will lower your interest rate and can save you a lot of money in the long run.
Meeting with the Mortgage Broker
Ask your real estate agent to set up a meeting with a mortgage broker so you can compare rates offered by area banks and other lending institutions. To expedite the process, gather your financial paperwork before the meeting, The mortgage broker will typically ask for your tax returns going back two years, W-2 income forms, pay stubs, up-to-date credit statements, and recent banking and investment account information. You will also have to provide information about divorce agreements and child support payments. Homebuyers with the best credit scores, low debt-to-income ratios, and substantial down payments will generally qualify for the lowest interest rates.
Types of Mortgage Loans
There are several main types of mortgage loans that affect your interest rate – fixed rate, adjustable rate, and “hybrid” loans that combine features of both fixed and adjustable mortgages. Balloon payment mortgages have a large final payment that comes due at the end of the loan. This type of loan benefits homeowners who plan to move after a few years.
A fixed-rate mortgage has the same interest rate for the duration of the mortgage, whether the mortgage is a 30-year, 15-year, or other duration.
Adjustable-rate mortgages, referred to as ARM’s, have interest rates that change over the course of the loan. Because the rate changes, your monthly payment may also change. The ARM is tied to an index and may have a cap that limits increases in the interest rate yearly, as well as a limit on how much the rate can go up over the duration of the loan. Since the rate goes up as time goes by, the ARM benefits buyers who plan to move or refinance after a short period of time.
Hybrid mortgage loans may begin as a fixed rate and then convert to an adjustable-rate mortgage.
It is a good idea is to allow an experienced real estate agent to guide you in getting expert advice for the best mortgage interest rate.