How to Get the Best Mortgage Rate

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Getting the best mortgage rate will depend on both market conditions and your creditworthiness. These involve improving your credit and choosing a good time to lock your rate. While market conditions aren't in your control, you can always improve your creditworthiness by making sure your employment record, credit score and debt-to-income ratio are in optimal shape before you apply for a mortgage.

What Do Mortgage Underwriters Look For?

A mortgage underwriter assesses your application by analyzing your credit history, your capacity to pay the debt and the value of the lender’s collateral. An underwriter will review your credit report, appraisal, income, assets and debts as part of this assessment process. This information is compared against the lender’s guidelines and loan criteria to determine loan approval and loan terms.

Credit Score

Credit score is an important factor in qualifying for a low interest rate. If you don't know your credit score, there are several resources that can help you find out. Many credit card companies will provide credit scores to their cardholders, and online services like Credit Karma or myFICO can also tell you your credit score. Generally, a credit score of at least 700 is considered good. A lower score may result in a denied application or costly loan terms, while a higher score will lead to lower rates and better terms.

If your credit score is less than ideal, there are some steps you can take to increase it. This begins by making up any missed payments and staying current on your bills throughout the mortgage application process. Balances on credit cards should be kept as low as possible. Keep unused credit cards open and refrain from opening new credit cards that you don’t need. Correct any errors on your credit report by notifying the credit reporting bureaus.

Debt-to-Income Ratio

Another important part of your credit picture is your debt-to-income ratio (DTI). This is the number you get when you divide monthly debt payments by monthly income. There are two types of DTI ratios: front-end DTI, which includes only housing-related debts, and back-end DTI, which includes all types of debt. Many lenders will deny applicants with a front-end DTI over 28% or a back-end ratio over 36%.

The lower your DTI, the better your loan rate will likely be. Since your lender looks at a snapshot of your finances at the time of your application, lowering your DTI in anticipation of applying for a loan will assist in approving your loan terms. DTI can be reduced by paying off or consolidating debt and cutting unnecessary expenses.

Loan-to-Value Ratio

The final major factor is your loan to value ratio (LTV). LTV is the amount of the loan divided by the appraised value of the home you’d like to purchase. Most lenders will allow you to borrow up to 80% of the value of your home. Exceeding that 80% threshold will likely result in added fees in the form of private mortgage insurance (PMI) and potentially a higher interest rate. Having a lower LTV increases your chances of getting a lower interest rate. You can lower your LTV by making a larger down payment amount.

How to Shop for a Mortgage Lender

In shopping for a mortgage lender, you should remember to consider not only the interest rate but also the fees you may need to pay upfront. Costs like origination fees, underwriting fees, title fees and other closing costs can add up, and a slightly lower interest rate may be irrelevant if the upfront fees are too high.

Look at Both APR and Interest Rate

A good way to compare both fees and interest rate is to look at a loan's advertised annual percentage rate (APR), which combines the two into one annualized number. The APR is meant to help consumers shop for a loan, and it does a better job of describing the true overall cost of your mortgage. This is what makes the APR different from the regular interest rate.

Consider Local Mortgage Lenders

While shopping for mortgage lenders, don’t forget to include local banks and credit unions. Due to a variety of reasons, these smaller lenders sometimes offer better terms and lower fees than nationwide banks. They also tend to be more flexible in their underwriting criteria if you have a less-than-ideal credit profile. When considering a credit union, make sure you confirm that you're eligible for membership, and take into account any membership fees when making your decision.

Know Your Loan Options

Also consider the different types of mortgage products available at each lender. VA loans, which are offered to current and former military members, can be particularly favorable if you have a lower credit score or a high LTV. Another low-cost loan product to consider is an FHA loan. Like a VA loan, FHA loans feature less stringent eligibility criteria and lower down payment options, but they’re not limited to servicemembers or veterans. The rates for VA and FHA loans may also be better for people who would otherwise face steep rates on a conventional loan.

How to Get a Lower Mortgage Rate

The type of loan you choose also influences the rate you can expect. The most common mortgage loan is a 30-year fixed-rate loan. The predictability of a fixed rate comes at the cost of a higher rate than an adjustable-rate mortgage (ARM)—at least initially. ARM loans will start at a lower interest rate for a set period that is usually five, seven or 10 years.

After that time, the rate on an ARM can either rise or fall each year, based on prevailing market conditions and the terms of the loan agreement. If you aren't planning on staying in your home beyond the initial fixed-rate period, or if you feel market rates will fall by the end of the fixed-rate term, the lower introductory rate of a variable loan may be a good option.

The duration of your mortgage, or term, will also play a role in determining interest rate. Loans with shorter terms generally come with lower rates but higher monthly payments. For example, a 30-year fixed-rate mortgage of $100,000 at 4.625% has a monthly payment of $514 and a cost of $185,090 over the life of the loan.

Mortgage TermRateMonthly PaymentLifetime Cost
30 years4.625%$514$185,090
15 years4.250%$752$135,410

The same loan amount for 15 years at a rate of 4.25% will have a monthly payment of $752 and a cost of $135,410 over the life of the loan. If the monthly payment for the 15-year loan is a stretch, you can always get a 30-year loan, then make occasional extra payments on to reduce your overall interest paid.

Discount Points and Rate Locks

You can also directly lower your mortgage rate by paying more upfront. Buying discount points allows a borrower to "buy down" the interest rate. Discount points are different for every loan, but the cost is generally a fixed percentage of the total loan amount.

Also, surveying market conditions and interest rate trends can help pinpoint the right time to lock your rate. Since rates can fluctuate daily, this can be a moving target, and most loan officers will advise you to lock your rate quickly if the terms are acceptable. Some lenders may offer a float-down option, which permits you to lower your locked rate if market rates fall.

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