Interest rates have been on the rise so far this year going from 4% at the end of 2017 to almost 5% today.
With rates on the rise it’s more important than ever for borrowers to get the lowest interest rate possible.
Here are 8 tips that will help you get the best rate on your next mortgage.
Check Rates: Check Today’s mortgage Rates
1. Check Your Report for Errors
You can get a copy of your credit report once a year for free at annualcreditreport.com.
Go through your report with a fine tooth comb. Mistakes on credit reports happen more often than you think.
The FTC published a study showing one in five consumers reported having at least one error on their credit report.
If you do find errors in your report you can file a dispute with the three major credit bureaus.
2. Keep Your Credit Utilization Ratio Below 20%
Your FICO score is one of the biggest factors in determining the interest rate you receive on a loan is.
The higher your credit score is, the lower your interest rate will be.
Your credit utilization ratio is the amount of credit you’re using. If you carry a high balance on your credit card it’s negatively affecting your credit score.
For example: If your credit limit is $10,000 and your balance is $6,000 your utilization ratio is 60% which is very high.
We recommend keeping your utilization ratio at 20% or lower.
If you’re unable to pay down your debt you could ask your creditor for a credit limit increase.
3. Get Loan Quotes From Multiple Lenders
Closing costs will vary depending on the lender you use. Typically, you can expect to pay between 2%-5%.
When a lender gives you a quote they are required to provide you a loan estimate. The loan estimate breaks down the closing costs and all lender fees.
You should get loan quotes from multiple lenders to make sure you’re getting a competitive deal.
You can also use the quotes to help you negotiate the lowest rate and negotiate closing costs.
4. Consider Different Loan Types
The most common loan term is a 30 year fixed-rate mortgage. However, you can get a lower rate by going with a shorter loan term like a 15 or 10 year fixed-rate.
If you’re not planning on staying in the home for the next five years consider an adjustable-rate mortgage.
ARM’s come with an interest rate almost a full percent lower than a 30 year fixed mortgage.
However, if you do end up staying in your home for more than 5 years your interest rate will most likely increase.
5. Buy Down Your Rate
Discount points are pre-paid interest. One discount point is equal to 1% of the loan amount.
Example: If you’re loan is $200,000 you can buy one discount point for $2,000. 1 point will lower your interest rate by approximately .25 percent.
Buying down your rate only makes sense if you’re planning on staying in the home for at least 7-9 years.
You should speak to your loan officer to see if buying down your rate is a good idea.
6. Lock in Your Interest Rate
Interest rates are changing every day. Even a tenth of a percentage point could save you thousands of dollars in interest over the life of a loan.
The good news is that you can lock in a low rate weeks, even months in advance of closing.
While it is very difficult to know what will happen to rates in advance, a good loan officer should be able to help you lock in the lowest interest rate possible.
7. Compare Loan Quotes within 30 Days
One of the most common reasons buyers give for not getting several loan quotes is that they do not want multiple credit inquiries.
However, FICO, the credit scoring model used by mortgage lenders has a “rate shopping window”.
Multiple inquiries from the same type of lender will only count as a single inquiry. As long as it is done within 30 days.
You definitely want to compare loan offers from multiple lenders, just make sure you do it quickly.
8. Use a Larger Down Payment
The interest rate on a loan is usually determined by the risk factor.
The risker the loan, the higher interest rate the lender will charge.
One of these risk factors is the loan-to-value ratio. A low LTV ratio means less risk.
Instead of just putting 5% down, you can use a 20% down payment.
Not only will you be financing a lower amount which means your monthly mortgage payment will be lower. You may also get a better interest rate.
The Bottom Line…
During a housing market with rising interest rates it’s more important than ever to get the lowest rate on your loan.
By making sure your credit score is as high as possible before applying you can be assured you’ll get the most competitive rates.
Don’t settle for the first offer. You need to compare loan estimates from at least 3 different lenders.
Be open to different loan terms, you can get the lowest interest rate with a 15 year fixed-rate mortgage.
Are you ready to compare loan quotes?