How to Get the Best Mortgage Rate
Ready to swap your apartment key for a key to your first home? One task you'll need to add to your to-do list is applying for a mortgage. Before taking this step, you should make a few moves to make sure you get the best mortgage rate possible. A lower rate means a lower monthly payment, and the lower your monthly payment, the more money you will have for other goals, like paying down your debt or traveling to exciting locations. Check out the factors that influence your mortgage rate and what you can do about them.
What Steps Should You Take Before Applying for a Mortgage?
Before applying for a mortgage, make sure your credit score is as high as possible. Your score is one of the most influential factors for your mortgage interest rate. The higher your credit score, the better your interest rate.
Review your credit report for any inaccuracies you need to dispute. Once you know your credit report is correct, determine what you can do to boost your score. One easy way to boost your score is to decrease the utilization of your revolving credit, such as credit cards and lines of credit. Keep your utilization at 30 percent or less to boost your score.
Make sure you make all your loan payments on time, as late payments hurt your score. If you already have negative information on your credit report (like missed payments or collection accounts), you can't remove the negative information if it's accurate. However, the effects of the information lessen with time.
How Do the Loan's Terms Influence the Rate?
The terms of the mortgage are another significant factor for mortgage rate. One key factor is the amount of the mortgage compared to the value of the home. Generally, the higher the mortgage relative to the home's value, the higher the interest rate. For example, if you want to buy a home that costs $200,000, having a down payment of five percent ($10,000) yields a higher interest rate than a down payment of 20 percent ($40,000). You should weigh the benefits of making a larger down payment versus the effect on your liquid savings. It may be wise to keep some money in savings for emergencies versus obtaining a slightly lower interest rate.
Mortgages with shorter terms usually have lower interest rates than those with longer terms. The interest rate for a 10-year mortgage is typically lower than the rate for a 30-year mortgage. Adjustable rate mortgages (ARMs) tend to have a lower initial interest rate than fixed rate mortgages. However, if the rate increases, it boosts your payment. Some borrowers prefer the stability of a fixed rate mortgage.
Should You Pay for a Lower Rate?
Your lender may give you the option to pay an additional fee in exchange for a lower interest rate. This loan fee is known as discount points or simply points. Though paying points increases your upfront mortgage costs, it decreases your overall interest expense for the life of the loan. Generally, one point equals one percent of your loan amount. How much each point decreases your interest rate depends on the current interest rate conditions and your lender's terms.
To decide if it's a smart decision to pay points, you can use a calculator to determine when you will recoup the cost of the points through your interest savings. For example, assume you're paying $2,000 to decrease your interest rate by 0.25 percent. You would recoup the interest savings in eight years. If you plan to stay in the home longer than eight years, paying the points will save you money in the long term.
Why Do Mortgage Rates Experience Daily Fluctuations?
If you check mortgage rates regularly, you will notice they fluctuate slightly throughout the week. Sometimes the rate may vary in a single day. There are a few different factors that affect mortgage rates and contribute to these fluctuations.
Mortgage rates are based on the trading value of mortgage-backed securities (MBS). An MBS is a type of bond, and these bonds are traded throughout the day. If demand for MBS is high, this increases the demand, causing mortgage rates to drop. When demand for MBS falls, this lowers the trading price, resulting in higher mortgage rates.
MBS prices are influenced by several details, including:Economic conditions Housing market Existing rate conditions
For example, if a report comes out with an encouraging economic outlook, this gives investors hope that the housing market will continue to thrive and people will continue to apply for mortgages. They believe MBS will be a profitable investment, boosting the trading price and lowering mortgage rates.
When you find a fantastic rate, you can have your lender lock in the rate for a specified duration. The lock on the rate is good for a stated number of days, even if mortgage rates go up.
Do Rates Vary with Different Lenders?
It's common for rates to vary slightly across multiple banks and financial institutions. Each bank may have its own process for assessing risk. Some banks may offer promotional interest rates for well-qualified customers (individuals with high credit scores). Other financial institutions give customers who already have a relationship with them (such as a checking or savings account) a slight discount on the interest rate
Make sure you shop around with multiple lenders so you get the best mortgage rate. When comparing numbers from different banks, use the official loan estimate. This document breaks down all your mortgage expenses so you can make an accurate comparison. In addition to your mortgage conditions ( interest rate, mortgage term and the type of mortgage you're applying for), it gives you an itemized list of the closing costs associated with the loan.
What If You Want to Purchase Land Instead of a Home?
Perhaps you haven't found a house that meets your needs, or maybe you're waiting to build your dream home. In the meantime, you've found the perfect land parcel for your new home. Because the land doesn't have a dwelling, you can't use a mortgage to finance the purchase. Instead, you need a land loan.
Land loans are similar to a mortgage because the land acts as collateral for the loan. This means if you default on the loan, the lender can seize the land. It's often harder to procure approval for a land loan. These loans are riskier for lenders, so they may require a higher credit score or a larger down payment. The term is also shorter than typical mortgage terms.
Once you're ready to build your home, you could take out a construction loan to finance the building costs. When the home is complete, you can take out a mortgage to replace both the construction loan and the land loan.