This time last year the 30-year mortgage rates were just over 3%, but they are rising and now are over 5%. Professionals in the industry say that we will see more rate increases throughout the year. Here are some tips from the experts on how to make sure you get the best mortgage rates for your home.
1. Raise your credit score as much as possible
The higher your credit score, the lower your interest rate. LendingTree’s data shows borrowers with credit scores of 760 or higher were offered an average APR that was 16 basis points lower than the average rate for borrowers with scores between 680 and 719. A basis point is equivalent to 0.01% and therefore one hundred basis points equals 1%.
Always know your credit score. Take a look at your credit report and make sure there are no errors. In order to raise your score, you should pay your bills on time and reduce your amount of debt. When you decide to get a mortgage, do not apply for too many new credit lines at the same time.
2. Get your finances in order
Your credit score is just one of the things a lender will take a look at. In order to make sure you are able to repay the loan, a lender will delve deep into your finances. Before they do this, you want to make sure you have the entire picture of your income and you will want to pay down any major debts.
To do this, you will need to know your debt-to-income ratio (DTI). Your DTI is the total of your monthly debt divided by your gross monthly income. A lender will want this figure to be 43% or less of your assets. Prepare a record of your steady income by collecting your pay stubs for a 30-day period as well as your W-2s from the past two years. If you are self-employed, you will also need to submit profit-and-loss statements along with your tax returns.
3. Save big for your down payment
You will want to make the largest down payment possible. The more you put down upfront the lower your interest rate. You will also want to make sure you put down at least 20% to avoid PMI. PMI stands for private mortgage insurance, which is around .05% to 1% of the loan amount.
4. Get quotes from 3-5 lenders
Shop around for the best deal. According to Greg McBridge, chief financial analyst at Bankrate, you should compare around three to five lenders to see who will offer you the best rate and other incentives.
“Be sure to look at closing costs, fees, points and tax credits. This can get a bit overwhelming, so if you have a financial planner, be sure to include them in the discussion,” says Jen Grant, certified financial planner at Perryman Financial Advisory.
“Gather all your rate quotes on the same day. Rates fluctuate daily and lenders should be able to give you their best rate out of the gate,” says Denny Ceizyk, senior staff writer at LendingTree.
5. Lock in the rate
This is important especially when rates are rising. Locking in your mortgage rate early on means your lender can’t raise your interest rate between the time you apply for a loan and the time you’re approved. That way, should the market fluctuate during the application process, you’ll be spared from paying higher interest rates if they go up.
6. Weigh the pros and cons of buying points
Discount points can be used to reduce interest rates. They are fees that you pay upfront to reduce your interest rate on your mortgage. One point usually costs around 1% of your mortgage amount. One point can lower the interest rate by one-eighth to one-quarter of a percent. “The lowest rates quoted often come with mortgage points, a minimum loan amount requirement or a certain amount of equity,” says Ceizyk.
7. Consider first-time buyer programs
First-time home buyer programs include aids such as down payment assistance, funds available for repairs and remodeling, no-interest second loans and reduced interest rates. These programs are used to lure first-time home buyers to certain areas. FHA loans, USDA loans and VA loans are common for home buyers with lower credit and smaller down payments.
8. Apply for a shorter loan term
Shorter term loans (such as a 15-year loan) can offer better rates than loan term loans (such as a 30-year loan. “Lenders price loans based on risk. If you can pay your loan off faster at a higher payment, lenders reward you with a lower payment because as your balance is paid down, there’s less risk you’ll default,” Ceizyk says.
If you are in the market for a new home, turn to a Realtor in your area. A Realtor can not only help you find the right home for the right price but can also lend a hand in finding the right mortgage lender.