Your home is likely the biggest purchase you will ever make.
And it’s such a large transaction that chances are you’ll probably need to borrow money to make it happen. Very few of us have $200,000 in cash to throw down for a new home.
Since a home loan is such a big commitment, there is a lot to consider. From filing the correct paperwork to making sure you can afford your home, it’s important to do things right.
Part of getting it right means doing what you can to get the best mortgage rate possible from the get-go. Here’s how to make that happen.
Why you want the best mortgage rate
It might not seem like a big deal to pay 6.00% APR on your mortgage instead of 4.00% APR. After all, it’s only a relatively small difference.
However, a mortgage is a significant purchase, with repayment terms spanning long periods of time.
Getting the best mortgage rate can save you thousands of dollars throughout the life of the loan. That’s what makes interest rate variations such a big deal.
If you Google “mortgage calculator” a simple form comes up. It can help you determine how much you could pay in interest with a small change in interest rate.
For example, let’s say you borrow $200,000 at 3.92% APR. You’ll end up paying $140,427 in interest over the course of 30 years. Additionally, your monthly payment will be $946 per month.
But, if you bump that interest rate up to 6.00% APR, your total interest paid at the end of 30 years is $231,676. And, your monthly payment is now $1,199.
Ultimately, when you look at the examples listed above, a higher interest rate results in you paying an additional $91,249. Imagine what you could do with that money if you invested it, instead of paying it out in interest.
Don’t forget to consider cash flow as well. With the higher interest rate in our example, you pay an extra $253 per month.
Paying attention to the best mortgage interest rates can save you money each month. Not to mention help you stay within budget.
Remember, the bigger the purchase, the more the interest rate matters. So make sure you get the best rate on your mortgage from the very beginning.
How to get the best mortgage rate
If you want access to the best mortgage interest rates, it’s important to start looking ahead of time.
Here are some of the things you can do to ensure that your mortgage rates are the lowest they can be.
Work on your credit score
The first thing any mortgage lender looks at is your credit. Your lender will pull your credit history and check your credit score.
In order to get the best mortgage rate, you probably need a credit score of at least 720. Some lenders may even want it a little higher than that.
Getting your credit to that point requires a few months of tinkering if you have reasonably good credit. However, it might require more effort on your part if you have a thin credit file or if you’re fixing a credit mistake.
Check your credit reports
Go on AnnualCreditReport.com and review your credit report for any errors. Make sure you fix any mistakes that could be dragging you down.
A few years ago the Federal Trade Commission found that a significant number of credit reports contain errors. So take the time to review your information and dispute any incorrect items if necessary.
Make your payments on time
According to myFICO, the biggest name in credit scoring, the most important factor in your credit score is your payment history.
You can go a long way toward boosting your score just by making sure all your payments are made on time.
Reduce your debt
MyFICO points out that the next biggest factor impacting your score is the amount of debt you have. If you pay down your credit card debt, you could see a huge improvement in your credit score over time.
Use alternative credit reporting
Let’s say you have “thin file” and there isn’t enough information to give you a credit score. Consider using alternative credit reporting to start building credit ASAP.
And if you need to go this route, it may make sense to take a year or two to establish a good credit history before applying for a mortgage.
Other ways to keep your credit file in order include maintaining a long credit history, having a good credit mix, and reducing the number of times you apply for new credit.
Set aside a bigger down payment
You can get the best mortgage rate by boosting your down payment.
Interest rates are essentially based on the amount of risk you offer. So anytime you can reduce your risk, you have the potential for a lower interest rate.
When you pay zero down, it’s considered a bigger risk than if you put down 10 percent. And if you put down 20 percent, you could increase your access to the best mortgage interest rates.
Pay attention to the type of mortgage you get
Your mortgage type matters when you look at how to get the best mortgage rate.
Consider your mortgage loan options
If you choose a stated income mortgage instead of a conventional mortgage, you might pay a higher rate.
That’s because a stated income loan isn’t as rigorous when it comes to paperwork, which changes the game a little bit, adding to your risk.
Review your mortgage rate options
You can also get different rates depending on whether you choose a fixed or variable mortgage.
This can get tricky, though. A variable rate might be lower to start with, but the interest rate might go up later, costing you money over time.
Fixed rate mortgages are a little higher, but you don’t have to worry about interest hikes down the road. Over time, a fixed rate can actually be a better deal.
Jumbo loans, which are used to make bigger purchases, also come with higher rates than conventional loans. So consider the size of your mortgage carefully before signing on the dotted line.
Don’t forget to shop around. Different lenders offer different rates.
Additionally, you can look online to see if you can get a better rate elsewhere. Technology makes it possible for you to get loans from almost anywhere in the country nowaday.
Did you know you might be able to pay for a lower interest rate? If you know you will be in your home for a longer period of time, it might be worth it to pay points.
Each point you pay results in a lower interest rate. Run the numbers to see if it makes sense for you to reduce your mortgage rate with points.
Better mortgage rates = money saved
At the end of the day, getting the best mortgage rate can save you hundreds of thousands of dollars over the life of your loan.
Work to improve your credit and research your loan options. With a little effort and legwork ahead of time, you can save big each month during the total mortgage loan term.