Tips for Getting the Best Mortgage Loan Rates

Buying a home is exciting. It’s an investment in your financial future, it’s an opportunity to build wealth over time, and it’s a way to provide security and safety for yourself and for your family. But if you can’t pay for your future home in cash, you’ll need a mortgage, and you’ll want to find a lender that can offer you the best loan terms and lowest interest rates.

Not sure how to do that?

Here are our top tips for getting the best mortgage loan rates, no matter what home you plan to buy or which type of mortgage you choose.

Know Which Type of Mortgage You Qualify For

Before you can start shopping for lenders, identify which types of mortgages you might qualify for.

Buyers with lower credit scores might consider an FHA loan. Veterans can save money with a VA loan. Well-qualified buyers with good credit might opt for a conventional loan. Physicians looking to buy a home without a large down payment may choose to get a physician mortgage loan.

No matter what type of mortgage you choose, you’ll want to get the lowest interest rate you possibly can, and there are several ways to do so.

Improve Your Credit Score

Lenders typically offer lower interest rates to homebuyers with higher credit scores.

Good credit scores indicate creditworthiness and make you less of a risk to a lender. A history of good credit and a low credit utilization rate shows lenders that you’re likely to make payments on time, which means they’re more likely to offer you a lower interest rate.

Improve Your DTI

DTI is your debt-to-income ratio, and it directly affects your interest rate. Conventional lenders generally require a DTI of 50% or less, meaning that no more than half of your income can be attributed to paying down existing debt. The lower your DTI, the better.

For some potential home buyers, such as high income-earning physicians with large amounts of student loan debt, their DTI ratio can disqualify them from obtaining a conventional mortgage. Physicians looking to buy a home should investigate the “doctor loan,” which doesn’t calculate your student loan debt in the same manner as credit card or personal loan debt.  

Checkout this article to learn all the other benefits that a physician mortgage loan has to offer.

Choose a Shorter Loan Term

You’ll pay less in interest if you choose a shorter loan term. The majority of homebuyers opt for a 30-year mortgage to keep monthly payments as low as possible, but choosing a 15 or 20 year term will get you a lower interest rate. This can save you tens of thousands of dollars in interest over the life of the mortgage.

Purchase Discount Points

You can lower your interest rate by purchasing discount points. Here’s how it works:

Each point costs 1% of the loan amount and typically reduces your interest rate by 0.25%. Initially, these points will increase your closing costs, but over the lifetime of your loan, this can add up to big savings.

Most conventional lenders allow you to buy up to four points, so if you’re looking to buy a $500,000 home, you’ll have to pay $20,000 upfront to get a 1% reduction in interest. Depending on the cost of the home you plan to buy, it might be more beneficial to add that $20,000 to your down payment to reduce your borrowed amount or pay off $20,000 in debt to improve your credit score and earn you a better rate that way. 

Make a Larger Down Payment

The bigger your down payment, the lower your interest rate may be.

Why?

Because when you invest more you have more stake in your home, and lenders see you as a lower risk.

Lenders love low-risk buyers, and they’ll give you better rates for being one. Just like having a higher credit score, a larger down payment makes you less risky in the eyes of the lender.

Choose a Fixed Rate Loan

Be wary of adjustable, variable interest rates. These often start out low but increase year after year.

While fixed loans may come with a higher interest rate to start, they don’t increase over time. This ensures that the principal and interest portion of your monthly payment remains steady throughout the duration of the loan term.

Compare Loan Lenders

No matter the price, size, or location of your home, it’s always best to obtain quotes and compare loan terms from at least three lenders before choosing the one you want to work with.

Even if you have an established relationship with a particular lender, comparing several is the best way to know if you’re getting the best rate possible. Yes, it takes time to apply to multiple lenders and fill out multiple application forms, but you can simplify the process by working with a mortgage specialist or mortgage broker who can do some of the legwork for you.

Will a lender lower your rate if other lenders are offering you better terms?

They might.

Even if your preferred lender won’t budge on your interest rate, they might be willing to reduce the cost of certain closing costs, such as the origination fee, title services, or discount points.  

Consider Refinancing

If you’re not comfortable with the interest rate you agreed to, you always have the option to refinance a loan.

Refinancing has its pros and cons. On the upside, it can minimize your interest payments to lower your monthly payments overall. On the downside, closing costs and other fees are associated.

Experts recommend refinancing as a good option if you can lower your interest rate by at least 2%.

In Conclusion

Interest rates fluctuate, so whether you’re looking to purchase your first home, buy an investment property, or invest in a vacation home, do your research to know what type of rates are available to you.

Even a 0.50% rate reduction can save you tens of thousands of dollars over the life of your loan. So before you sign any documents, shop around to make sure you’re getting the best possible deal.