How to Get the Best Mortgage Interest Rate

How to Get the Best Mortgage Interest Rate

When you’re buying a home on a tight budget, qualifying for the lowest mortgage rate becomes extremely important. The larger your loan, the greater the impact a difference in interest rates will have on your monthly payments.

For example, if you had a loan of $100,000, the monthly payments would rise by just $30 with an interest rate change from 4.5 percent to 5 percent. If your loan balance were $500,000, the difference in your payment under similar circumstances would be $151.

A lower mortgage rate also impacts the total amount of interest you will pay over the life of your loan. A $100,000 30-year fixed-rate loan at 5 percent requires $93,256 in interest payments; whereas an interest rate of 4.5 percent requires $82,407 in interest payments — a savings of $10,849 over the full length of the loan. Similarly, on a $500,000 loan you could save $54,245 in interest with the lower 4.5 percent rate.

Steps to the Lowest Mortgage Rates

Lenders have different standards and loan programs, so it’s important to shop around on the same day (since rates change frequently) for the same loan terms to find out who is offering the lowest rates. In the meantime, you can also consider these other options to qualify for the lowest interest rate:

§  Pay points: A discount point, equal to 1 percent of the loan amount, can be used to buy down your interest rate. Generally, paying one point at closing will buy down your rate by about 0.25 percent, but think carefully whether this is the best use of your cash.

§  Shorten your loan term: Shorter loan terms generally have lower interest rates, although the difference between the rates varies. For example, on Jan. 10, 2014, the average mortgage rate for a 30-year fixed rate loan was 4.64 percent compared to 3.74 percent for a 15-year loan. However, given the shorter term, your payments will be higher.

§  Consider an ARM: Adjustable rate mortgages (ARMs) have a lower interest rate for the first few years (you can find 1-, 5-, 7- and 10-year ARMs) and then adjust, usually on a yearly basis. You’ll need to qualify for the loan based on the highest possible mortgage rate (ARMs are capped so they can’t go higher than the cap) and be prepared for the worst-case scenario, but in the meantime you can benefit from a lower interest rate.

§  Improve your credit score: Lenders tack on slightly higher interest rates for borrowers with a credit score of less than 740. The rates are a bit higher for every 20-point difference in your credit score, so making changes such as paying off debt and paying all your bills on time before you apply for a loan can help.

§  Increase your down payment: Interest rates are also based on your loan-to-value and will be lower if you make a down payment of at least 20 percent. If you can manage to make a down payment of 30 percent or 40 percent your interest rate will be even lower.

§  Wait to lock-in your interest rate: Home buyers often choose to lock in their mortgage rate 60 to 90 days before closing to avoid the danger of rising rates. However, lenders charge a slightly higher interest rate for lock-in periods. Ask your lender for advice about when to lock in, but you may want to consider a shorter 30-day lock once your settlement date is determined.

While qualifying for the lowest possible interest rate is important, be sure you understand your loan terms and your budget before you sign the papers for a new loan.