The process of buying a home is a very involved one, and can be daunting, especially for first-time buyers. It’s often a whirlwind of paperwork, credit reports, and scrambling to tie up loose ends.
One of the biggest factors that goes into calculating your monthly mortgage payment (other than the size of the loan itself) is your interest rate. Some of this is determined by the Federal Reserve, but it is mostly determined by you and where you stand financially, and many factors are considered. Here are ten tips on securing the best interest rate on your new mortgage.
Choose between a fixed or adjustable rate mortgage
While many people might be wary of an adjustable rate mortgage (ARM), it can be a better option for those who plan to pay off their mortgage in a short amount of time. For the introductory period of an ARM loan, the interest rate will be lower than that of a fixed rate mortgage. Just make sure you’re prepared to see an increase in your monthly mortgage payment after the introductory period is over.
Make the biggest possible down payment
The larger your down payment, the less money the lender will have to give you, and the lower your interest rate can be. Your interest rate is partially based on your home’s loan-to-value (LTV). For example, if a home is worth $200,000, and the loan is for $199,000, that would be considered a high LTV and is more risky for a lender. If this ratio is lower, however, you might be rewarded with a lower interest rate.
Make sure your credit is in excellent shape
While there is no one credit score needed to buy a house, those with higher credit scores have usually demonstrated good financial competency, and those are the types of consumers to whom lenders can offer lower interest rates.
Pay for points
It it possible to pay extra directly to your lender in order to lower your interest rate. For every one percent of your loan amount you are willing to pay extra, it could amount to as much as half a percent off your interest rate. Essentially, you are just paying a larger amount of interest up-front.
Have a long employment history
Even if you haven’t been at the same job for several decades, demonstrating that you have no (or minimal) periods of unemployment shows lenders they can count on you to pay your mortgage in full every month. This can help lower your interest rate.
Prove income stability
If you can prove that your line of work is in high demand with no sign of slowing down, or if you work for a large, profitable company, your lender may take this into account when processing your paperwork. Income stability will help show that you won’t be likely to miss any mortgage payments.
Lower your debt-to-income ratio
Even with a high credit score, it’s possible to accumulate a lot of debt. Lenders don’t want you using more than roughly 40 percent of your monthly income on your mortgage, car payments, and credit card bills. The lower your debt-to-income ratio, the lower your interest rate will be.
Build up cash reserves
Most people know they should have enough savings to cover about six months worth of bills. Proving to your lender that you can still pay your mortgage in the event of a job loss will help you score a lower interest rate.
Different lenders have different criteria for their loans. Finding the one that suits you best can help ensure you get the best possible interest rate for your financial situation.
Close on your loan as quickly as possible
Some buyers need 30 days to close; others might need as much as 60 days. If you can close within the initial 30 day window, however, you might pay as much as a half a percent point less than those who need 60 days to close.