With high home prices, young prospective homebuyers know it’s vital to get the lowest mortgage rates possible. But how can one get a lower mortgage rate? Here are some valuable tips to get the best mortgage rates today:
1. Elevate Your Debt-to-Income Ratio and Manage Your Finances Better
The Debt-to-Income Ratio (DTI) is the total monthly debt payments divided by gross monthly income. Lenders’ primary measure is assessing a borrower’s ability to manage the monthly mortgage payment. To calculate this ratio, divide all monthly debt payments by your gross (before taxes) monthly income. If your debt payments (including the mortgage) total $2,500 and your gross monthly income is $7,000, your DTI would be 35.7%.
On an FHA loan, the maximum DTI ratio is typically between 43%-50%, but in some cases, the lender may allow a higher DTI. For a conventional loan, the usual maximum DTI is 43%-45%, but some lenders may allow up to 50%.
The lower the DTI, the better the chances for mortgage approval and receiving a better interest rate. Paying off debts in full, such as a car loan or buying a less expensive home can help lower your DTI ratio.
Another way to obtain the lowest mortgage rate is to have the highest possible credit score. With a credit score above 720, you may save as much as half a percent on the home loan. To improve your credit score, pay all bills in full and on time, keep your credit card balances low and do not open any new accounts before applying for a mortgage.
2. Build a Strong Connection with Your Lender
Building a strong connection with a mortgage lender is important in obtaining the lowest mortgage rate. Having your finances well organized and sharing them honestly and transparently builds a strong rapport and will motivate the lender to look for the best mortgage rates and terms for you. Ask about all loan possibilities, such as FHA vs. conventional, fixed-rate vs. adjustable-rate mortgages (ARM) and 15 vs. 30-year loan payments.
Lenders can be local or online. Some online lenders have excellent reputations. As long as they are licensed to provide mortgages in your state, it doesn’t matter much if you never meet face-to-face.
3. Reduce Your Lender Fees Through Negotiation
Many people just accept the lender fees as such and don’t realize you may negotiate them. One way to ascertain the lowest interest rate or lender fees is to shop around across multiple mortgage lenders. If one lender offers a better rate, ask another to match or beat it. You can also ask your lender to reduce or waive some of their fees.
A Mortgage Broker with access to multiple rates and terms not available to a specific lender may be able to give you the best deal. Sometimes, brokers charge a fee or commission, so one should weigh the money saved on the mortgage rate against any fees charged.
It’s also possible to lower the interest rate by buying discount points. One discount point equals 1% of the loan amount and will reduce your rate by 0.25%. On a $300,000 loan amount, one discount point would cost $3,000. Discount points are only worthwhile if you plan to stay in the home for a long time. If it saved you $50 per month, it would take 60 months to break even on the discount point.
4. Quicken Your Loan Settlement Period
When multiple bids are made on a property, sometimes the sellers will lean toward working with someone who can deliver a shorter closing period. If the home is vacant, the seller may be paying two mortgages and has to carry charges such as utilities, taxes, insurance and maintenance, so a faster closing saves them money.
When shopping for a mortgage lender, getting preapproved and requesting a faster timeline, such as 30 days instead of the usual 45-60 days, could help you win a bid or save you money on the home price. Your Realtor may recommend a lender with a reputation for fast closings.
To close faster, it’s important to respond to the lender’s requests for documents quickly and early in the closing process. Have the home inspection and appraisals performed within the first week after signing the contract. Ensure the loan process is smooth by maintaining regular contact with your mortgage lender and Realtor. Documents can be presigned if necessary and paperwork can be signed electronically if needed.
5. Explore First-Time Buyer Programs
There are many costs associated with buying a home, but first-time homebuyer programs are often available to help young people on both national and state levels.
The Neighborhood Assistance Corporation of America (NACA) is a national program that helps underserved consumers buy homes with no down payment, no closing costs, no mortgage insurance, no fees and most importantly – a very low mortgage interest rate. NACA distinguishes between priority members (household income is below the median family income for the Metropolitan Statistical Area (MSA) where they are purchasing a home) and they can purchase a home anywhere within the MSA.
NACA presently offers a 4.875% 30-year fixed mortgage for priority members and 5.875% for non-priority members. These interest rates are well below the average 30-year fixed-rate mortgage of 6.27%.
One reason that NACA can offer rates this low is they have a financial counseling program that is mandatory for all borrowers. The program has reduced NACA’s mortgage default risk substantially to only 0.00012. NACA can also close the loan in 21 days if both parties are ready.
Every individual state offers first-time homebuyer assistance with down payments or closing costs. The California Housing Finance Agency has a “CalHFA” program that offers “silent seconds,” or loan payments on a secondary mortgage that are deferred until the home is sold.
Florida offers 18 programs for first-time homebuyers to help with down payments, closing costs and even mortgage interest rates. Pensacola and Escambia County are joint participants in the HOME homebuyers Program, which helps low-income families obtain affordable housing. Up to $12,500 in down payment and closing cost assistance is given as a zero-interest deferred payment loan.
Most larger banks also offer first-time homebuyer programs to assist with down payments and closing costs. For example, JPMorgan Chase & Co (NYSE: JPM) provides eligible borrowers with up to $7,500 to lower their interest rate, put toward closing costs or increase the down payment.
6. Finding the Perfect Loan Term
According to the Federal Home Loan Mortgage Corporation (Freddie Mac), 90% of all homebuyers choose a 30-year fixed mortgage because they can afford a larger loan with affordable, unchanging payments for a better home. However, the 30-year loan is not the only term. Other common terms are the 15 and 20-year loans.
The main advantages of a shorter-term mortgage are the loan will be paid off sooner and the borrower will save thousands of dollars in interest over the years. For example, a $300,000 loan over 30 years with 3.5% down at 6.25% has a total cost of $641,700. But, the 20-year term’s total cost is only $427,800 and the 15-year is $446,803. You can see the long-term savings are substantial.
However, the monthly payment is much higher with the shorter-term home loan. The monthly principal and interest (P&I) on the 15-year $300,000 loan at 6.25% is $2,746, whereas the 30-year P&I is $2,047. The borrower who qualifies for the 30-year may not qualify for a 15-year loan.
Many borrowers prefer the less-pressured option of the lower monthly payment but say they will probably make extra principal payments to shorten the life of the loan to 15 years. There are two problems with this strategy. First, although many people say they will make the extra payments, only a small percentage will follow through. Other things in life seem to get in the way all the time.
The second problem is that the 15-year loan has a lower interest rate than the 30-year loan, often by 0.50% to 0.75%, depending on economic conditions. Therefore, although the example above compared the 15-year and 30-year loans with the same interest rate, the 15-year loan would likely have been only 5.75%, reducing the monthly P&I to $2,668 instead of $2,746 at 6.25%.
7. Securing Your Mortgage Rate
Once you receive a favorable rate quote, ask the lender to lock in the rate. Rate locks are good for 30 to 60 days, so be sure to ask about the length of time. Locking in the rate protects the borrower from paying more should interest rates rise before the day of closing. Since the borrower was prequalified at a lower mortgage rate, a rise in interest rates could disqualify the borrower from buying the home.
Sometimes borrowers hesitate to lock in, fearing the rate could go lower. Some lenders offer a one-time chance to replace the mortgage at a lower rate with no fee, while others charge a fee for allowing the borrower to swap out their mortgage rate. Ask the lender for their policy at the first contact.
The main advantage of obtaining a low mortgage rate is it reduces the monthly mortgage payment for the life of the loan. A $300,000 30-year FHA loan with 3.5% down at 6.5% will have a $2,094 monthly principal and interest payment. At 6.25% the monthly payment becomes $2,047, a savings of $47 per month. Over 30 years, the 6.50% loan costs $658,741, while the 6.25% loan will be $641,700, a total savings of $17,041.
But even better- the total cost of a $300,000, 15-year loan at 5.75% would be $432,727, saving the borrower $208,973 versus the 30-year loan at 6.25%!
Therefore, shopping around, negotiating with mortgage lenders and considering all loan types and terms are all crucial for getting the best mortgage rates.