5 Ways To Get the Lowest Mortgage Rate Possible Right Now
Written by
John Schmoll
Edited by
Brendan McGinley
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Buying a home is an exciting time for many Americans, but it’s also the most expensive purchase most make. High interest rates have made it challenging for many would-be buyers to get into a home.
Fortunately, mortgage rates recently hit their lowest levels in over a year, according to Yahoo Finance. Declining interest rates can make buying a home more affordable for Americans who have been waiting. The rate changes daily; a 30-year fixed-rate mortgage is close to 6%, according to Freddie Mac, which is markedly higher than just a few years ago. If you’ve been waiting on the sidelines to buy a house until rates go down, here’s how to secure the best possible mortgage rate.
1.     Strengthen Your Credit Score Before Applying
Lenders reserve their best rates for borrowers with strong credit. It’s possible to get a conventional loan with a credit score of 620, but the higher the score, the better. If you’re in the market to buy a home, you’ll typically snag better rates with a score of at least 700 or higher, according to Realtor.com.
Ordering a free credit report on AnnualCreditReport.com is a wise first step to identify where your credit stands. Identify any errors you find and dispute them, and pay down card balances. Combine that with avoiding opening new lines of credit to put your credit in the best possible position, as even a small improvement can save significant money over the life of the loan.
2.     Reduce Your Debt-to-Income Ratio
Excessive debt often signals a lack of healthy credit habits to many lenders. After reviewing your credit report, make a plan to reduce indebtedness as much as possible. Doing so reduces your debt-to-income (DTI) ratio, which represents how much of your monthly income goes towards your monthly debt payments.
Lenders traditionally have a maximum DTI of 36% of your total monthly income to offer a loan, according to Fannie Mae. Paying off even a small balance or loan can possibly reduce your DTI in a meaningful way.
3.     Increase Your Down Payment
How much you put down on your house reduces the lender’s risk, which, in turn, often gets you a lower rate. Hitting certain thresholds, such as 10%, 15% or 20% can be beneficial for would-be buyers.
If you can put down 20% that’s best as it helps you avoid private mortgage insurance (PMI). PMI can add up to 2% of your original loan amount per year, according to Rocket Mortgage, which can mean hundreds more on your monthly mortgage payment.
4.     Shop Around To Get the Best Rate
Mortgage rates can vary widely between lenders. Even a 0.50% difference can mean significant savings on large debts over lengthy periods. It’s best to comparison-shop lenders when pursuing a mortgage, and don’t overlook using competing offers to negotiate, as you may find a lender willing to beat a rate in the right circumstances.
Credit reporting agencies commonly count multiple inquiries as one if you do them within a short timeframe, typically 14-45 days, so it pays to comparison shop. Rates move daily, so ask to lock in a rate you like once you get serious about buying.
5.     Buy Mortgage Points
For a savvy buyer, purchasing mortgage points can be a fruitful way to effectively buy down your mortgage rate. Traditionally, one point costs roughly 1% of the loan amount, and it reduces your rate by 0.25%.
For example, if you get a $400,000 mortgage with a 6.50% rate, and buy one point, you would pay $4,000 at closing to get a 6.25% rate. Buying points isn’t for everyone, so it’s important to do the math to ensure you’ll be in the house long enough to break even on the upfront cost.
Even though mortgage rates have been high, they are showing signs of relief. With some work, you can snag a lower rate and reduce your total monthly cost.
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