With interest rates rising, getting the best mortgage rate is more important than ever. Your mortgage interest rate affects your monthly payments and how much you will pay in total over the life of the loan.
Your loan interest rate depends on many factors, including your down payment, creditworthiness, the value of the home you are buying, the loan term, and more. We’ll break down what you need to know to get the lowest rates.
How to get the best interest rate on your next mortgage
When considering options for your next mortgage, it’s best to be as prepared as possible to complete your loan application and get the lowest interest rates possible.
“There are three pillars: your creditworthiness, your income (translated into a debt-to-income ratio), and your wealth,” explains Josh Moffitt, president of Silverton Mortgage in Atlanta.
Follow this seven-step process to get the best price.
Improve your credit score
Keep employment records
save on deposit
Know your debt-to-income ratio
Choose a 15-Year Fixed Rate Mortgage
Comparison store between multiple lenders
secure your tariffs
1. Improve your credit score
A lower credit score doesn’t automatically prevent you from getting a loan, but it can be the difference between getting the lowest possible interest rate and more expensive loan terms.
“Credit scores are always an important factor in determining risk,” said Valerie Saunders, vice president of the National Association of Mortgage Brokers (NAMB). “Lenders will use the score as a benchmark for determining a person’s ability to service their debts. The higher the score, the more likely the borrower will not default.”
The best mortgage rates go to borrowers with the highest credit scores, usually 740 or higher. Generally speaking, the more confident a lender is in your ability to make your payments on time, the lower the interest rate they offer.
To improve your score, pay your bills on time and pay off or eliminate these credit card balances. If you must carry a balance, make sure the balance does not exceed 20% to 30% of your available credit limit. Also, check your credit score and report it regularly and look for errors in the report. If you find any mistakes, work on fixing them before applying for a mortgage.
2. Do a good job of employment records
You are more attractive to lenders if you have a steady job and income for at least two years, especially with the same employer. Be prepared to provide pay stubs at least 30 days prior to your mortgage application and your W-2 for the past two years. If you get bonuses or commissions, you have to prove that too.
Or you are self-employed or your salary comes from multiple part-time jobs, it may be more difficult to qualify, but not impossible. If you are self-employed, you may need to submit business documents such as income statements in addition to your tax return to complete your application.
What if you are a graduate just starting your career or returning to the job market after a hiatus? If you have a formal job offer on hand, lenders can often verify your job, as long as the offer reflects the fees you will pay. The same applies if you currently have a job but are about to have a new one. However, if you’re entering an entirely new industry, lenders may flag your application. So keep this in mind when making major changes.
Gaps in your work history won’t necessarily disqualify you, but it does matter how long those gaps are. For example, if you are unemployed for a relatively short period of time due to illness, you may be able to easily explain the gap to your lender. However, if you have been unemployed for an extended period of time (six months or more), it may be difficult to obtain a permit.
3. Save on down payment
Saving more can allow you to lower your mortgage rate, especially if you have enough cash for a 20% down payment. Of course, lenders will accept lower down payments, but less than 20% usually means you have to pay for private mortgage insurance, which can range from 0.05% to 1% or more of the original loan amount per year. The sooner you pay off your mortgage on less than 80% of your home’s total value, the sooner you can get out of mortgage insurance and lower your monthly bills.
4. Know your debt-to-income ratio
Your debt-to-income ratio (DTI) compares your debt to the money you earn. Specifically, it compares your total monthly debt payments to your total monthly income.
In general, the lower your DTI ratio, the more attractive you are to lenders. A low DTI means you can make new loan payments without going bankrupt. The higher your DTI, the more income you have to pay off your loan, making it harder to take on more debt.
A popular rule of thumb for lenders is to avoid mortgages that require more than 28% of your monthly gross income. Your overall DTI should stay below 36%.
So if you make $5,000 a month, you want your mortgage payments to be no more than $5,000 * 0.28 = $1,400, and you want to make sure your mortgage payments plus other debt payments stay below $5,000 * 0.36 = $1,800.
The maximum DTI is 45% for traditional loans and 43% for FHA loans. However, there may be some exceptions if you meet certain requirements, such as B. Significant savings.
5. Consider a 15-Year Fixed Rate Mortgage
While a 30-year fixed-rate mortgage is common, if you think you’ve found a long-term home and have good cash flow, consider a 15-year fixed-rate mortgage to pay off your home faster. You also have the option of a 15-year term when refinancing your current mortgage. The current benchmark rate for a 15-year fixed-rate mortgage is 4.870%, according to Bankrate’s national survey of lenders.
6. Comparison store between multiple lenders
When looking for the best mortgage rate, even refinancing, do the necessary research to make sure you find the best mortgage rate for your situation. Don’t take the first price offered – it’s worth a shot. According to one study, borrowers received only one additional interest rate offer and saved an average of $1,500, and received five and saved an average of $3,000.
Look beyond your bank or credit union, talk to multiple lenders, and explore options online.
“Buy and compare based on the credit assessments you get,” Sanders said. “You don’t usually buy a car without a test drive first. Use your loan for a test drive before proceeding with the purchase.”
7. Lock your tariffs
The closing process sometimes takes weeks and prices can fluctuate during this time. After you sign a home purchase agreement and get a loan, ask your lender to determine your interest rate. There is sometimes a fee for this service, but it’s usually worth it, especially in an environment of rising interest rates.
Next step
Once you’ve found the best loan quotes and rates and applied for a loan, you’re one step closer to your next mortgage. Here is an overview of what to expect:
Within three days of applying, you will receive a loan estimate that includes mortgage details. This includes a list of checkout costs, but these are current estimates, not firm numbers. If you have questions about what is included in your credit assessment, you can ask your lender for clarification at this point.
Your lender’s underwriting department will review your application to determine whether your mortgage will be approved. During this time, you may be asked to provide additional documents or answer questions. So be prepared and react. Take care of your finances and work too – don’t take out new loans, make big purchases, or change jobs if you can avoid it.
If your mortgage is approved, you’re close to closing. If your loan is rejected, it’s important to find out what factors influenced the decision. In general, you can always apply for another mortgage from another lender, but it’s wise to wait a bit before you damage your credit.
As you approach your closing date, you will receive a closing disclosure with final loan terms, including your interest rate and closing costs. If you have determined a low price, please ensure that the price on this document matches the price you originally offered. Keep in mind that rate locks usually only last for a certain period of time. Therefore, it is best to work with your lender to avoid delays in the closing process.
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