- September 3, 2018
- Posted by: dhfadmin
- Category: Financing, Mortgages
Home buyers often wonder how to find the lowest mortgage rate when there are so many options online. All of the information can be so confusing especially when you start to compare the various fees and options but the answer is simple.
What I have learned is the best way to find the lowest mortgage rate is to start by preparing yourself up to a year in advance. This preparation process includes these 4 steps:
- Improve your credit score
- Save for a down payment
- Select the right loan program
- Select the right term
Successful completion of these three steps will help you to find the lowest mortgage rate when you are ready to buy your home or refinance.
What most consumers do not know when applying for a mortgage is that mortgage rates can be very complicated. Lenders have a whole menu of different adjustments they have to make before providing you with a rate quote. The four steps I am about to take you through have the greatest impact, but there are many more things that can impact your rate quote.
Improve Your Credit Score
Credit scores are a huge factor and quite possibly may be the most important. It is not just your score but also whether you have had prior late mortgage payments, collections and of course a bankruptcy or a foreclosure. These things can create an additional bump on your interest rate.
What is a good credit score? You should target 720 or higher. From an interest rate perspective, 720 is the high water mark. A score of 800 for example will get you the same rate as will 720.
What is a bad credit score? The answer to this may vary based upon the loan program. However, what is important to know is that as your rate declines, your lender has to add on to your interest rate. For example, a score less than 680 may add 1/8 to your rate. Maybe a score less than 620 is half percent. This will vary but you get the point.
If you are ready to apply for a loan and your credit scores are not where they need to be, then it is most likely too late for you to get the lowest mortgage rate. The credit improvement process needs to start up to a year in advance. Read more about how to improve your credit score.
Save For a Down Payment
Saving for a down payment is often overlooked and it is also something you need to start doing well in advance. The larger the down payment, the lower your credit score. There are exceptions of course as in the case of an FHA loan where you get competitive rates with only 3.5% down. Other than government programs like FHA, coming to the table with cash improves your chances of getting a low mortgage rate.
The traditional down payment requirement would be 20%. This would also eliminate the need for PMI (Private Mortgage Insurance). However, some lenders have interest rate improvements if your down payment is even larger than 20%.
If you do not have sufficient funds to get 20% down, I would suggest getting a down payment gift from a relative or look into an FHA loan.
Select The Right Loan Program
This is critical and will also impact your interest rate. That being said, you now have to ask yourself what is most important to you? Is it the low interest rate or a lower monthly payment? In your personal scenario, you may find that an FHA loan will have a lower interest rate than a conforming 30 year fixed. However, the FHA loans come with a mandatory mortgage insurance premium which may actually result in a total monthly payment that is higher.
If you are a veteran you should absolutely look into getting a VA loan. In an earlier blog post I talked about why the VA Mortgage is the best loan program on the planet. Zero down payment and low rates. If you are a veteran this should be your choice.
Another option is the interest only loan where you are only required to make interest payments but send principal payments only if you can. In this scenario your interest rate may be slightly higher but your monthly payment would be lower.
Select The Right Term
The first thing you should do before shopping for a loan is ask yourself how many years you plan to live in the home. For many people, the home they are about to buy may just be a temporary residence. Maybe you will sell the home after your kids finish high school or maybe you just relocated for work but only plan to be there for just a few years. If this is a short term situation, then why go for a 30 year term? There are other options out there such as a 5/1 Arm. For this, you will most likely have an interest rate (for the first 5 years) that is lower than what the 30 year fixed would be. Then, after the fifth year the rate would adjust once per year. Loans come in other term lengths too so discuss your options with your lender.
Now that you know how to prepare yourself in advance to have the best chances to get the lowest mortgage rate, it would be a good idea to speak with a lender. We have done all of the lender research too so when you are ready, click for a free consultation with one of our lenders and to see who has the lowest mortgage rates.