After the crash of the housing and mortgage industries, lenders are taking serious issue with potential borrowers to reduce the risks of defaults. Strict measures have been put in place to verify a borrower’s financial abilities before any mortgage loan is a approved. Not only are people finding it harder to secure a mortgage approval, it is also proving more difficult to get a good interest rate on the mortgage.
Why a low mortgage rate matters. Securing a low interest rate on a home loan is important because it will dictate how much you have to pay monthly and how much you will need to pay in finance fees over the life of the loan. A high rate might mean you are paying more in interest for you home than you are on the actual purchase price. Getting a good interest rate will depend on many factors, many of which are within the borrower’s control.
How To Get a Better Mortgage Interest Rate
There are many factors that go into your mortgage application – these are some of the factors that will have the greatest impact on your overall mortgage interest rate.
A Solid Credit Score Can Save You Thousands
One of the first things a lender will do is pull a copy of your credit report and credit score. You should do the same before applying for a loan. Lenders are now looking for credit scores of 720 or higher in order to provide the best interest rates on a loan. If you credit score is lacking or you have a history of late payments, you may not only get a high interest rate, you may be denied a mortgage loan.
On the flip side, having a mortgage can increase your credit score because it shows a regular payment history. You may be able to use this to your advantage to refinance to lock in a lower interest rate.
This table show how a good credit score can affect your mortgage rates (example: 30 year fixed mortgage at $300,000):
|FICO® score||APR||Monthly Mortgage Payment|
Get a copy of your credit score: You can check your credit score by following these instructions: FICO Credit Score.
Increase Your Down Payment
The more money you pay down, the less you have to borrow. Your interest rate can be reduced based on the amount of money you put up as a down payment. Ideally, lenders are looking for 20% or more down on the purchase price of the home. Making a down payment of 20% or greater can also help you avoid Private Mortgage Insurance (PMI) which generally costs several hundred dollars per year.
Length of Mortgage Loan
If you opt to take a 15 year mortgage versus a 30 year mortgage, your lender may be able to provide a better interest rate. If you can afford to pay off a mortgage loan in a shorter period of time, take the option.
Your lender will verify your income and calculate the amount of mortgage you can afford to pay based on your other financial obligations. Your ability to pay back the monthly mortgage payment will be affected by how much money you make. A lowered-interest rate may be possible if the ratio between your debts and income is balanced and you can prove you can afford monthly payments.
Type of Mortgage – Fixed or Adjustable
In recent years, many borrowers opted for an adjustable rate mortgage because they paid smaller monthly payments for several years and then were responsible for making a larger ballooned payment later in the mortgage. This proved to be part of the reason many homes fell into foreclosure as borrowers could not afford the lump sum payment. A fixed-rate mortgage means all payments through the life of the mortgage are the same once an interest rate is locked in at the time of loan commitment. The amount of your mortgage interest rate will vary based on your financial history, the market, and the type of interest rate you are pursuing.
Qualifying for lower mortgage interest rates: To wrap it up, if you want to qualify for the lowest mortgage rates, then you need to have a good credit score, borrow less money in conjunction with a 20% or greater down payment, get a shorter loan period, provide proof of income, and get a fixed rate mortgage.