Buying a home is exciting, but figuring out how to afford one can be overwhelming. If you’re like most people, you’ll need a mortgage to finance your home. The problem? Mortgage rates can make a huge difference in how much you’ll pay over the years.
A lower rate means a lower monthly payment and big savings over time, but how do you get the best deal? Many people assume they have no control over their mortgage rate, but that’s not true.
If you’re planning to buy a home soon or refinance your current loan, here are six tips to help you secure the best mortgage loan rates.
1. Improve Your Credit Score
Your credit score is one of the most important factors in determining your mortgage rate. When you go to get a mortgage loans, lenders use it to measure how risky it is to lend you money. The higher your score, the lower your interest rate is likely to be. If your credit score is on the lower side, taking steps to improve it can make a big difference.
Paying your bills on time is essential since late payments can hurt your score. Reducing outstanding debt, especially high credit card balances, can also improve your creditworthiness in the eyes of lenders.
2. Save for a Larger Down Payment
A larger down payment can help you qualify for a lower interest rate because it reduces the lender’s risk. When you put more money down upfront, you’re borrowing less, which makes you a more attractive borrower.
If possible, aim for a 20% down payment. Not only can this lower your interest rate, but it can also help you avoid private mortgage insurance (PMI), which adds extra costs to your monthly payment. Even if a 20% down payment isn’t realistic, putting down as much as you can afford may still result in better loan terms.
3. Shop Around for Mortgage Loans
Not all lenders offer the same mortgage rates, so shopping around is crucial. Many homebuyers make the mistake of accepting the first mortgage offer they receive, but comparing multiple lenders can save you thousands of dollars over the life of your loan.
Banks, credit unions, online lenders, and mortgage brokers all offer different loan options, and each may have different terms, fees, and interest rates. Getting quotes from at least three to five lenders allows you to compare offers and negotiate for better rates.
4. Choose the Right Loan Type and Term
The type of mortgage you choose can affect your interest rate and how much you pay over time. Fixed-rate mortgages offer stability because the rate remains the same throughout the loan term.
This can be a good choice if you plan to stay in your home long-term and want predictable monthly payments. Adjustable-rate mortgages (ARMs) start with a lower rate that can change over time, which may be beneficial if you plan to sell or refinance before the rate increases.
The length of your loan term also impacts your rate. A 30-year mortgage typically has a higher interest rate than a 15-year mortgage.
5. Lower Your Debt-to-Income Ratio
Lenders evaluate your debt-to-income (DTI) ratio to determine how much of your income goes toward paying debts.
A lower DTI ratio indicates that you have a manageable amount of debt compared to your earnings, making you a lower-risk borrower. If your DTI is too high, you may not qualify for the best mortgage rates. Reducing your debt before applying for a mortgage can improve your chances of securing a lower rate.
