Mortgage Advice

How to Get a Low Interest Rate on Your Mortgage Loan

August 9, 2013

Rising interest rates have left some homebuyers wondering whether they’ve missed the opportunity to secure a great rate on their mortgage loan. Fear not. You still have a chance to secure a decent rate before they rise even more. Here are eight ways you can improve your chances of qualifying for a low interest rate on your mortgage loan:

  1. Maintain a good credit score. Not only does your credit score impact your ability to qualify for a mortgage loan, it’s also used to determine what your interest rate will be. The higher your credit score, the lower your interest rate. To help you improve your credit score (and save thousands of dollars on your mortgage loan) we’ve put together a list of five ways you can increase your credit score.
  2. Reduce your debt. At the end of the day, lenders want to make sure you can afford to repay your loan. They use the debt-to-income (DTI) ratio to determine how much extra debt you can reasonably afford to take on. Because it is less risky to loan money to someone with less debt, lenders are more likely to give you a lower interest rate on your loan if you have a low DTI ratio. To reduce your debt (and improve your credit score), focus on paying down any revolving debt and/or other loans you have.
  3. Save up for a larger down payment. The more money you have to put down on a house, the better your interest rate will be. You see, when you make a down payment on a house, you’re essentially building equity in the home. The more equity you have in your home upfront, the less money you’ll need to borrow for a mortgage and the lower your loan-to-value (LTV) ratio (and interest rate) will be. Ideally, lenders prefer homeowners to have a down payment of 20%. However, not everyone has the luxury of putting that much down on a house. Whether you have 3.5% or 15% to put down on a home, it’s in your best financial interest to save up for a larger down payment.
  4. Shorten the term of your loan. The shorter the term of the loan, the better the interest rate will be. A 15-year loan will have a lower interest rate than a 20-year loan, which will have a lower interest rate than a 30-year loan. Although choosing a shorter term could potentially increase your monthly mortgage payment, it will help you save more money in the long run. Before you decide on the term of your mortgage loan, consult with your loan officer to find an option that fits with your financial goals.
  5. Ask for an adjustable rate mortgage (ARM). If you’re a first-time homebuyer searching for a starter home to live in for the next 3-5 years, it might make sense for you to consider getting an adjustable rate mortgage. Adjustable rate mortgages often come with lower interest rates and a lower monthly payment. However, the interest rate associated with an adjustable rate mortgage will fluctuate based upon various market indices. Consult your loan officer to learn more about adjustable rate mortgages.
  6. Consider paying points. If you could pay money to get a better interest rate on your mortgage loan, would you? Before you quickly answer, “yes,” you need to determine whether paying points is right for you.
  7. Choose your closing date wisely. Once you’re approved for a mortgage loan, you have the option to lock in your interest rate. When you lock in a rate, lenders must honor the agreed upon rate, even if mortgage rates change. Most lenders offer a lock in period of 30, 45, 60 or 90 days. It’s important to consult with your lender and choose a lock in period that aligns with your closing date.
  8. Shop around. Getting a mortgage loan is probably one of the biggest financial decisions you’ll make in life. Take the time to contact multiple lenders and compare their good faith estimates (GFEs). When inquiring about interest rates, remember to also ask about fees and closing costs, as these additional expenses will add to the overall cost of your mortgage loan.