Mortgage interest rates have been at historically lowest levels in recent years, but while they’re expected to remain relatively low in the near future, some increases appear to be forthcoming. Given this, it has become even more important to shop around for a “good” interest rate. Through careful research and by taking meticulous measures, you can save a substantial amount over the life of your loan. Consider the following pointers in finding the best possible interest rate for you.
Improve your credit score
Your credit score greatly influences the interest rate you’ll get for your loan. The higher your credit score, the lower the interest rate.
Obtain a credit report from Experian, Equifax and Trans Union to find out how you may improve your credit score. Some of the most effective measures include reducing your loan balances, paying overdue accounts, and reviewing and correcting errors in your credit report.
Demonstrate income stability
Lenders will look more favorably on your loan application if they find that you have a steady and reliable income source for at least the past two years.
Bring your debt-to-income ratio down
A high debt-to-income ratio (DTI) can diminish lenders’ trust in your ability to pay, resulting in a higher interest rate. The DTI is computed two ways. The back-end ratio takes all your monthly debt payments, including the projected payment for the new home, and divides the total by your monthly gross income. The front-end ratio considers only your housing expenses.
The ideal front-end ratio is 28% or lower, and the ideal back-end ratio is 36% or lower. Look for ways to bring your DTI as close to these levels as possible.
Determine how long you’ll stay in your new home
This will help you decide which loan terms would be the most favorable for you. If you don’t intend to stay longer than 10 years, then taking out a standard 30-year mortgage doesn’t make sense. An adjustable rate mortgage (ARM) may work better, as this has lower initial interest rates. You may opt to sell your home before the interest rate resets to a higher percentage.
If you feel an ARM is too risky, you might want to consider a shorter-term fixed interest rate. Or, if you do plan to keep your home for a long time, then a 30-year fixed rate mortgage might be the best option.
Consider a higher down payment
The higher upfront payment you make, the lower you’ll pay in monthly amortizations and interests. Do the math and compare the difference in your monthly payments based on different down payments, then determine which one would work best for you.
Shop for a lender
Get in touch with various lenders and ask for their loan packages, then compare these against each other. Some pointers to consider:
- Interest rates change daily and even hourly, so to get the best comparison, get rates for the same day from different lenders.
- Include all fees in your comparison, including loan processing fees and any additional closing costs.
- A good place to start shopping for lenders is the Internet, on trusted sites like Bankrate or Zillow. You may also ask for referrals from people you know and trust.
Need some additional help in finding a great interest rate? Get in touch with me at 760 622 5087 or [email protected]