A home purchase is a huge financial obligation that could take the biggest bite of your budget. You’ll probably consider a mortgage loan to finance your purchase, but the interest could end up costing you more than you would expect.
Need extra breathing room in your current budget? Lowering your mortgage rates can help you free up funds for other financial obligations. Here are ten ways to get a lower mortgage rate.
Improve Your Credit
The first stop your lender makes when approving your mortgage is on your credit report. Your credit score is a roadmap to your creditworthiness.
A higher FICO score will give lenders the confidence that you will eventually repay your debt, hence attracting a lower rate. A lower score will entice lenders to charge a higher rate.
Shop Around for Low Rates
While your credentials will help you qualify for the best rates, shopping around will help you score the lowest rates. The advent of online comparison tools and calculators has made it incredibly simple to compare mortgage rates from different lenders.
Credit unions are an excellent place to compare rates since they offer lower rates than conventional banks. A credit union may also be lenient to consumers with unattractive credit profiles.
Refinancing to a Lower Rate
Refinancing to take advantage of lower interest rates can help you lower your payment. You will need sufficient home equity to qualify for refinancing, besides meeting other requirements. Equity is your home’s market value less what you owe on your mortgage. Experts suggest that refinancing is worth it if you’re able to reduce your rate by one percentage point. However, remember that you will pay the refinance closing costs.
Reduce the Term of Your Mortgage
Shortening the length of your mortgage can help keep your rates low. Most homeowners usually buy homes with a 25-year mortgage. However, lenders often provide incentives to homebuyers who pay their debts quickly. Taking out a 10-year or a shorter-length loan than a 25-year term will obviously lower the interest rate you will pay.
Put a Higher Down Payment
The amount of cash you put down on buying your home can help you get a lower mortgage rate. While the rule of thumb is to make a 20% down, a higher down will help you secure a lower rate. Putting sufficient money down to lower your home loan may save you thousands of dollars.
Ask Your Lender for a Better Rate
Getting a lower rate on your mortgage may be as simple as asking your lender for a better rate. If you have an excellent credit score, it could pay off to ask your lender for a lower rate based on your excellent history. You could also ask a lender to match a particular competitor’s interest rate. Lenders often want people with excellent credit ratings, so they can easily show some leniency to do business with you.
Consider Points and Promotions
Some lenders will give promotions for lower rates or discounts if you qualify. You can also check your eligibility for various loan programs. Talk to a mortgage expert or your potential lender about any programs you are eligible for.
Points may help you lower your mortgage rate by making a cash payment upfront. A mortgage calculator that incorporates points will help you decide whether it makes a good deal.
Set up Automatic Loan Payments
Simple actions can save you money. Setting up automatic mortgage payments ensures you’re never late on payments, leading to a lower ongoing rate. However, you may not qualify for the same perks if you switch banks or close your account.
Have a Consistent Work History
Besides your credit score, most mortgage lenders will want to see a long, consistent work history. Lenders will be more likely to offer a lower rate if you have been working at the same place for years, and your annual income has been growing consistently. Credit unions and banks will often verify your employment status before the closing date of your home purchase.
Optimize Your Debt-to-Income Ratio
Banks will look at your current debt payments during the loan approval process. Lenders will compare your income to your monthly debt obligations (debt-to-income ratio) to see whether you can afford the mortgage. If you can increase your revenue and clear any outstanding debts, you’ll have an attractive DTI for your mortgage application.
A home purchase is a significant life investment, and the smallest interest rate savings could be worth several thousand dollars. The tips above can score you the lowest possible rates for your mortgage.