When you apply for a mortgage, your interest rate is one of the most important aspects of your loan. All other factors equal, the lower the rate you can get, the lower your monthly payments will be. Obtaining a great rate instead of a not-so-great one could save you tens of thousands of dollars over the life of your loan. While you can’t control every factor that influences the mortgage rate available to you, here are ten strategies that may help you secure a lower rate.
1. Improve your credit scores
Your credit scores are one of the biggest influencers of the mortgage rate you can obtain. Generally, a FICO Score of at least 740 is required to qualify for the best available rates. While there’s often no quick way to improve weak numbers, it’s never too soon to start building and maintaining strong credit scores.
2. Build a record of employment
With the right financials, it’s possible to qualify for a mortgage if you’re self-employed, unemployed or retired, but lenders generally prefer to see at least two years of steady employment history. A strong employment record could also help you qualify for a better rate. If you’re planning to apply for a mortgage, speak with a loan officer before considering any changes to your employment status.
3. Optimize your debt-to-income ratio
When you apply for a mortgage, one of the factors your lender will evaluate is your debt-to-income (DTI) ratio. This measures your total monthly debt payments against your total monthly gross (before income tax and other payroll deductions) income. Lenders typically require a DTI of 43% or lower to qualify for most mortgages, and if you can reduce your DTI even further by paying off debt or increasing your income, you may be able to obtain a lower rate.
4. Lock your rate quickly
Mortgage rates are always changing, which means the longer you wait to lock your mortgage rate, the higher it could potentially rise. Thankfully, at Draper and Kramer Mortgage, we allow you to lock your rate up to 90 days before closing if you’re shopping for a home or up to 360 days before closing if you’ve chosen a property.
5. Consider all available loan programs
Although they’re not available to everyone, some mortgage programs offer lower interest rates than others. These may include loans for first-time homebuyers or military-connected borrowers. Be sure to explore all your options with your loan officer.
6. Make a bigger down payment
You may be able to finance a home purchase with a down payment as low as 10%, 3% or even 0%. However, making a larger down payment, especially one of at least 20%, could help you qualify for a lower interest rate, avoid paying mortgage insurance premiums or both.
7. Explore adjustable-rate options
While a fixed-rate mortgage offers the security of an interest rate that will never change, an adjustable-rate mortgage (ARM) typically offers a lower intro rate than a comparable fixed-rate loan. Just be aware that after the end of an ARM’s intro period, which typically lasts five to 10 years depending on the loan, your rate and monthly payment could increase.
8. Consider a shorter loan term
Most borrowers choose mortgages with a 30-year term, but shorter terms are available, such as 15 years. These shorter-term loans usually offer lower rates, however, the monthly payments will be higher because you’ll be scheduled to pay off your loan in fewer payments. If you can afford to pay more each month, it may be worth the interest savings from a lower rate.
9. Look into buying discount points
One surefire way to lower your mortgage rate is by buying discount points, also known as mortgage points. These are fees you pay to your lender when getting a loan to lower your rate. If you plan to keep your loan for a long time, this may be a good deal, but if you refinance or sell before the “breakeven point,” you may not recoup the cost.
10. Refinance later when favorable
Even if you can’t get an ideal rate on your mortgage, there’s good news. You don’t have to be stuck with the same rate for the term of your loan. If mortgage rates drop in the future, you may qualify to refinance your mortgage and lower your rate.* While no one can predict the future direction of rates, they typically move in up and down cycles over the years, meaning a refinance opportunity may not be far off.
While getting a lower mortgage rate usually requires making some tradeoffs, by thoughtfully considering your options, you may end up saving significant money over the life of your loan. For a free mortgage consultation and rate quote to learn about your options, get in touch today.
Programs included on this document are subject to approval based on individual program guidelines and borrower’s credit and underwriting approval. Contact your Draper and Kramer Mortgage Corp. professional for full program details and requirements.
*By refinancing a mortgage, total finance charges may be higher over the life of the new loan. Contact your Draper and Kramer Mortgage Corp. loan officer to discuss the total expected costs and savings of your refinance.