9 Ways to Get Lower Mortgage Interest Rates
Whether you are planning to buy a home or make improvements to an existing home, property-related expenses can be huge. As most people don’t have that kind of cash at their disposal, banks and credit unions offer mortgages to finance the expense. The mortgage rate is an important factor to consider as a lower rate can dramatically reduce the total amount you spend. So here are a few ways to get low-interest mortgage loans:
Improve your credit score
From a lender’s perspective, the credit score of the borrower is directly proportional to their ability to pay the mortgage on time. In general, the higher the borrower’s credit score, the lower the interest rate the lender assigns. If you want the best interest rates, your credit score must be 740 or above. If your score is not there yet, make sure you do everything you can to improve your credit score before applying for a mortgage. This could include paying all bills on time and clearing outstanding balances.
Maintain employment and financial records
Lenders consider borrowers with long and consistent work history more reliable. If you have at least two years of employment and a steady or growing income, especially from the same employer, you’re more likely to get a lower interest rate. So, gather all your employment and financial information, such as W2 forms and federal tax returns from the past two years, and start building a sound record. Also, maintain a record or proof of all the bonuses and commissions you receive. Borrowers who are self-employed or whose income comes from multiple part-time gigs may have a hard time scoring a low-interest mortgage loan.
Make a hefty down payment
A bigger down payment (usually 20% or above) reassures the lender that the borrower is capable of paying back the mortgage, so they may offer a lower interest rate. Besides, other advantages of a big down payment are: having more equity in your house from the beginning and a lower principal amount to pay back later on. Further, as the total amount you pay in interest over the course of the loan is calculated on the principal, you will end up paying less interest overall.
Don’t focus on advertised rates
When shopping for a lender, you’ll notice many banks and other lenders highlighting their current mortgage rates on their websites. If you choose a lender solely based on these advertised rates, you might be making the wrong choice. That is because these rates typically represent an “ideal borrower”—one who has an excellent credit score and low or no debt and is willing to make a huge down payment. If you do not fit the description, the rate offered will be higher than the one advertised, and you won’t secure a low-interest mortgage loan.
Compare rates
A great way to ensure that you are getting the best deal on your mortgage is to apply for an estimate with at least three lenders. Among numerous lenders competing to attract borrowers, it is likely that one lender offers a more favorable rate than the others. In fact, even a difference of 0.25% in interest rates could mean you will pay thousands of dollars less over the life of the loan. So, it is crucial to compare rates. Search for banks, credit unions, and other lenders online and apply to get loan estimates.
Apply for a short-term loan
Every lender wants their money back as soon as possible. So, if you take a 10-year or 15-year mortgage instead of a 30-year one, your interest rate will likely be lower. Financial experts recommend choosing a term shorter than 30 years to get a low-interest mortgage loan. However, if you select a shorter term, you will have to make larger monthly payments to pay off the principal amount in a short period. Consider this option if your requirements and financial circumstances allow you to opt for a shorter-term mortgage.
Lock your rate
Sometimes the closing process takes a while, i.e., you may have to wait several weeks after applying for a mortgage till you are approved for the loan. The interest rate can change during this period, so you must consider locking your rate, which prevents the lender from increasing it due to changes in the market. However, a downside to this lock is that you may miss out on a better rate if current market rates fall further. So, speak with your lender about rate locks with a float-down provision, which gives you a one-time opportunity to lower your locked-in rate to current market rates. The float-down feature comes with a fee, however, it might be worth it to secure a low-interest mortgage loan.
Try negotiating the rate
Here is an unusual piece of advice: don’t be afraid to negotiate interest rates with the lender, no matter who they are—banks, credit unions, or other entities. As numerous lenders are competing for your attention, if one of them wants to negotiate based on other lenders offering you better rates, then this might get you a low-interest mortgage loan. The lender can lower the rate to match the other offer or even beat it. If the lender is not willing to reduce the rates further, ask them for other discounts or incentives that can make the deal more reasonable for you.
Avoid no-cost mortgage
In a no-cost mortgage, borrowers do not have to pay closing costs, which are the fees that banks and other lenders charge when you close or finalize the purchase. The closing cost can be a huge amount—usually 3% of the price of your home. While not paying it may seem like a great option initially, lenders usually cover closing costs by increasing the loan amount and/or charging a slightly higher interest rate. So, if you are specifically looking for a lower interest rate, it might be best to avoid a mortgage with no cost.
