Buying a home for your family is the biggest and most important purchase you make. This is especially true since real estate prices have sky-rocketed since the late 1990s well beyond the national inflation rate.
With something that comes with such a huge financial risk, it is never a good idea to take it lightly. It is a large financial obligation and if you are not careful, it can end up costing you more than it should.
Since it is nearly impossible for most of the world to be able to pay the entire price of the home they are purchasing, they tend to take out mortgages which come with an interest rate attached to it. If your mortgage rate is low, you will pay less over the life of the loan. Here is a list of ways you can ensure a low interest rate on your mortgage loan.
How to Get Low Interest Rate on Mortgage
- Keep a good credit score.
In order to get a low interest rate on mortgage loan, the first step is to keep your credit scores as high as possible. Lenders usually take a look at your credit score in order to determine your creditworthiness. Having a high credit score could lead to being certain that you will eventually repay your loan whereas a low credit score could attract lenders wanting to charge a higher mortgage rate or end up not lending to you at all. Whereas the interest rate on mortgages with bad credit can be pretty high.
Even though three of the top reporting credit agencies, Experian, TransUnion and Equifax, are secretive about how they calculate the scores, we know how FICO credit scores are calculated:
- 35% of your scores are based on your payment history so make sure you are paying on time.
- 30% is based on your credit utilization which means you should try to keep your aggregate utilization under 20%.
- 15% of your scores are based on the length of your credit history. Avoid closing accounts you have had for a long time so they can serve as evidence of your credit history.
- 10% is based on any new credit accounts which means you should open new accounts wisely.
- 10% of your scores are based on credit mix. This means that lenders want to see that you can handle different types of loans.
- Length and consistency of work history.
Along with a good credit score, it is important to have a long and consistent work history. For example, working at the same place for many years will have a good impression on your lenders and seeing growing annual incomes is only likely to make lenders give you a home loan that has an attractive interest rate.
Alternatively, if you have changed your job multiple times over the past two years, lenders may not be so quick to give you a big loan just because it sends the impression that your income is not reliable.
Banks and credit unions will verify your employment status before you can make an offer of a home. This would be done before the closing date of a home purchase. If you have quit a job or started at a new place during the closing process, you might end up jeopardizing your ability to get a mortgage loan.
- Shop around for the best rate.
It is always recommended that prospective home buyers shop around for the best mortgage rate possible before deciding on one product. Compared to 20 years ago, taking a look around is so much easier than it was back then thanks to the invention of the internet. You can easily compare mortgage rates from online banks and credit unions in order to find out the most attractive rate and who offers it.
It is easier to shop around at credit unions as they have lower fees than traditional banks. They also tend to pass some of these savings on to their members. Moreover, credit unions are also more willing to work with consumers with less perfect credit scores unlike traditional banks.
- Ask for a better rate.
When buying a mortgage, there is no harm in asking your bank to lower your rate. The worst possible answer you can hear in this circumstance is no. You can then move on to another bank that was offering a better rate. No harm done.
However, if you have an exceptional credit score that is 800 or higher, you could get away with asking the bank to lower the rate to match a competitor’s interest rate or request a lower rate based on your amazing credit history. Once you do that, you are likely to hear a “yes” in return. Lenders want customers with excellent credit scores and they do not mind going a little extra in order to get the business of such customers.
- Put more money down.
You should consider how much money you are putting down on your purchase. If you are taking a small loan, it is likely that the bank will charge a higher rate in order to make a profit for themselves. Likewise, loans with huge excess are called “jumbo loans” and tend to carry more risk for the bank. This is why they tend to carry a higher interest rate as well so that the bank can make sure they are protected from the loss.
- Shorten your loan.
Another way to lower your mortgage rate is to shorten the length of your loan. Financial institutions tend to prefer homebuyers who repay their home loans more quickly than people who carry on their mortgage for let’s say, 30 years.
- Consider the adjustable-rate vs. fixed-rate loan trade-off.
Another consideration homebuyers have the option of making to lower their mortgage interest rate is the adjustable-rate versus fixed-rate trade-off.
Adjustable-rate mortgages offer a teaser rate that is typically lower than the average mortgage rate for five or seven years. However, adjustable-rate mortgages adjust higher in order to match the prime rate. This would also include whatever the federal funds target is when the teaser time frame ends. If you are unprepared or there has been a large shift in interest rates over a five to seven year time frame, it would be likely to see an increase in home buyers’ monthly mortgage payment.
If you can easily pay off your home loan quickly, you might want to consider a loan with a teaser rate. But if you choose a fixed rate mortgage, nothing is left up to chance. You would know what you are getting upfront. This is a good trade-off that homeowners should consider.
So for people wondering, “can you negotiate the interest rate on a mortgage?”, the answer is no. There is a fixed-rate for a mortgage loan. You can, however, apply for an adjustable-rate mortgage.
- Pay for the points.
Prospective owners can also choose to pay for points.
Points are an upfront fee paid by homebuyers in order to lower their mortgage rates. Points are equal to 1% of the loan’s value and paying them can lower your ongoing interest rate by 0.125%.
For example, paying a point on a loan that is $250,000 would cost an extra $2,500 but in return, your interest rate would be reduced by 0.125% over the duration of the loan.
How can you determine what the smartest time to pay for points is?
You should pay for points when you plan on staying in your home for a long time. Decreasing your interest rate is only going to save you money over a 15-30 year time frame. However, most people tend to stay in their homes for an average of nine years. But this is something prospective home buyers should consider.
- Automatic mortgage payments.
Setting up an automatic mortgage payment method can ensure that you are never late in your payments and can result in your bank offering a lower ongoing interest rate. However, you would need to check with your financial institution to see if this is even offered.
You should keep in mind that if you close your account or change banks, the original bank that lent you could remove the discount applied for the interest rate in order to set up an automatic mortgage payment.
The last option for any homeowner looking to lower their mortgage interest rate is to refinance their existing mortgages. Since mortgage rates are at historic laws, homeowners that pay 100 basic points or more over the current rates may end up benefiting from refinancing.
However, for refinancing, homeowners need to be following all of the suggestions mentioned above, especially looking around for the best rates in order to refinance. They would also need to use a mortgage-loan calculator to decide if refinancing is really worth it.
One of the most frequently asked questions is, “Can you get a lower mortgage interest rate without refinancing?”
The answer to that question is, yes. All the alternate options given above besides refinancing can be achieved without the need for refinancing.
So now you know how to get a low interest rate on a mortgage. You can try all these suggestions that are bound to work for you. The best tip would be to speak to an attorney to get a better consultation about what works for you and what does not.