When it comes to taking out a mortgage, finding a home loan with a lower interest rate can save you thousands of dollars over the life of your loan. Whether you’re shopping for your first mortgage or looking to refinance, there are several things you can do to help increase your odds of getting a lower interest rate. Check out these tips and tricks that can help you obtain financing with an interest rate you’re more comfortable paying.
Boost Your Credit Score
Before handing over the great deal of money that usually comes along with paying a mortgage, lenders want to see evidence that they can rely on you to make your payments in a timely fashion. A solid credit score can make or break your efforts to obtain a home loan with low interest rates. The lower your credit score is, the more likely your lender will be to consider you a riskier candidate to lend money to. To compensate for this perceived risk, they’ll probably offer you a higher interest rate on your loan.
You can get a free copy of your credit report from all three credit bureaus each year at annualcreditreport.com. If you suspect your score is less than flattering, it may be worth it to head over to FICO’s free Loan Savings Calculator, where you can determine how much money you could save by bringing your score up. If you decide to go all out, you can even subscribe to its monthly app, which gives you an in-depth look at your scores and access to credit monitoring and alerts. These features can help you track whether your efforts are helping to elevate your score over time.
Lower Your Debt-to-Income Ratio
In addition to your credit scores, many lenders look at something called your debt-to-income ratio, or DTI. Your DTI shows the percentage of your monthly income that goes towards paying off debts, and the lower your DTI currently is, the better — it means you have more money to direct towards paying off a loan. According to the Consumer Financial Protection Bureau (CFPB), a 43% DTI is about the highest you can have if you want a chance at getting approved for a qualified mortgage.
Working to lower your DTI can go a long way towards lowering the home loan interest rates lenders offer you. But how do you go about it? In general, this process comes down to one of the two factors that go into determining your DTI in the first place: your income and your debt amounts. One way to address this is to take on more work to increase your income, while the other is to focus on lowering the total amount of debt you currently owe.
The latter may mean cutting back on expenses for a while so you can pay down debts faster. Ultimately, though, this will not only save you money on interest in the long run but will also help raise your credit score.
Increase Your Down Payment
If you have the time, it may be worth it to save up for a larger downpayment before you start shopping around for preapproval letters. In general, the larger the downpayment you’re able to make, the lower an interest rate you’ll be able to negotiate. Yet again, this all boils down to making sure lenders consider you as low-risk a borrower as possible.
If you’re not able to put down at least 20% on your loan, you’ll often have to pay private mortgage insurance (PMI). Not only could you end up with a higher interest rate, but you’ll also have PMI premiums to pay down until you’re able to cancel it. Even if you can’t make the 20% mark, the more you can put down upfront, the lower your PMI rates are likely to be. If you’re unsure how you’ll put together a respectable downpayment, then it may also be worth looking into downpayment assistance programs to see if you qualify for help.
Look Into Your Options
Consider comparing not only different lenders but also the interest lengths each one offers with loans of various lengths. For instance, you might find that you can get a lower interest rate if you opt for a shorter-term loan than a longer one. The tradeoff, of course, is that your monthly payments will likely be higher, so you should still make sure they fit your budget. After all, lower interest rates aren’t much good if you end up defaulting on the loan.
Additionally, you’ll want to make sure you consider all your options when it comes to finding the ideal lender. Don’t be afraid to do plenty of research when shopping for lenders with the best rates. Many lenders these days offer free online tools and calculators that can help you shop for the best rates for your financial situation. Once you’ve narrowed down your options, try to get quotes from at least three different lenders to compare and find the rates that best fit your needs.
Monitor Mortgage Rate Movements
Mortgage rates can fluctuate over time, and even the smallest changes can add up to a great deal of savings if you wait for the right moment to apply. Much like the stock market, mortgage rates can be unpredictable and can move based on factors like U.S. treasury bond yields.
Why does this happen? Lenders often sell bundles of closed mortgages to government-sponsored enterprises or investment banks to collect interest on mortgage-backed security bonds. When the yield rates of these investments change, mortgage rates often follow to stay in step. Getting in the habit of monitoring these rates can help you determine the best times to lock in the best rate.