Everyone wants the best mortgage rates, and for good reason. When you have access to the lowest mortgage rates, you can save tens of thousands of dollars during the life of your loan.
But how do you access those sweet, sweet mortgages rates?
Well, it takes a little effort. Here are five actions you need to take if you want to lock in the best mortgage rates:
1. Boost your credit score
Your credit score is your financial reputation. It offers a peek inside your past interactions with credit. That’s why the lowest mortgage rates go to those with high credit scores.
The good news is you don’t even need a perfect 850 to get a home mortgage. Credit scoring giant FICO points out that you can get a low rate if you have a score of at least 760.
So if you want to get your credit score up there, you need to take action to boost your credit history and reputation. Here are some of the most effective strategies you can implement, based on FICO’s credit scoring factors.
Make your payments on time
Do you have missed payments? Watch out. Those will have the biggest negative impact on your credit score.
If you want to improve your credit score (and lower your mortgage rate) you need to make sure you pay on time and in full regularly. So if you have some missed payments, start paying on time going forward.
Remember, the more on-time payments you have going forward, the quicker you can boost your score.
Pay down debt
You can give your credit score a boost by paying down some of your debt. Getting rid of debt so that you have a lower credit utilization can make a big difference in your score almost immediately.
You want to aim for a credit utilization percentage that’s under 30 percent according to VantageScore’s blog. That means you carry less than 30 percent of debt or credit available to you.
Don’t cut up your credit cards just yet
While it’s not as important as making on-time payments or getting rid of debt, your credit history can be a valuable part of your score. Therefore the longer your credit history, the better it is for your credit score.
And if you’re looking to give your credit score a little extra oomph, don’t cancel your long standing credit cards until after you close on your mortgage.
2. Choose a shorter mortgage term
If you are looking for low mortgage rates, consider getting a 15-year fixed-rate mortgage instead of a 30-year fixed-rate mortgage. That’s because a 15-year fixed mortgage usually comes with a lower rate than a 30-year fixed one. However, you have to be ready to make a higher monthly payment.
Compare different mortgage options to see what’s available. Figure out if you can afford the higher payments on a 15-year fixed so that you can get access to the best mortgage rates.
For example, as of March 2, 2017, Freddie Mac reports the national average on a 30-year fixed-rate mortgage is 4.10%, compared to 3.32% for a 15-year fixed-rate mortgage.
Be careful about choosing an adjustable rate mortgage (ARM) though. ARM rates are usually lower at first, but because they are adjustable, it means your rate – and your payment – could rise in the future. Therefore an ARM might not help you in the long-run.
3. Consider paying for points
Another strategy for getting the best mortgage rates is to pay for a lower rate. You can “buy down” your mortgage through a process known as “paying points.”
Basically, a point is equal to one percent of your mortgage amount. So, if you are borrowing $200,000, each point costs $2,000.
How much each point lowers your interest rate depends on the lender, but it’s relatively common to see a reduction in rate of between 0.125% and 0.25%, according to the National Association of Realtors.
Before you pay points to get a lower mortgage rate, run the numbers to see if it makes sense for you. Generally, the longer you stay in the home (paying interest), the more likely it is that paying points will result in long-term savings.
4. Make a bigger down payment
Sure, you can get a loan without making a big down payment. However, you might pay with a slightly higher interest rate.
You won’t necessarily end up with a much bigger interest rate with a smaller down payment, especially if you have good credit and a low level of debt. However, there are cases when a bigger down payment can give you an edge when negotiating your interest rate.
When I bought my home a decade ago, my high credit and low debt levels meant that I still qualified for the best available interest rate at the time, even though I got an FHA loan with a small down payment.
So if you’re hoping to shave a little off the rate, ask your lender if having a little more skin in the game will help you.
5. Comparison shop – and don’t be shy
One of the best things you can do to get the lowest mortgage rates is to comparison shop. Don’t be shy about getting a few quotes and letting lenders know you are shopping around.
If you are a good credit risk, and you are looking to buy, lenders are more likely to give you a good deal if you let them know you are shopping around. Therefore, get an online quote and start shopping it around to local banks and credit unions. Credit unions, especially, often have a little more leeway to offer better rates.
After you have all your ducks in a row, get the lenders to compete for your business. You might be surprised to find out that you can save a little extra in interest.
If you want the best mortgage rates, you need to lay the groundwork. Start by boosting your credit score and educating yourself about the process.
Then consider saving up money so you can make a bigger down payment or pay points. However you decide to proceed, just remember that being an informed mortgage shopper is the best way to ensure you get the lowest possible rate.