The median home price in the United States currently sits at around $276,000, according to recent data from real estate listing site Zillow. Since most people don’t have that much cash on hand, anyone who’s thinking about buying a home right now will likely need to borrow most of the money from a mortgage lender — plus interest. That’s why it’s important to shop for the best interest rate available, and do your own part to ensure you can qualify for the best pricing your lender offers.
Below are just a few things borrowers can do to help improve their chances of getting a good mortgage rate.
1.) Take care of your credit.
Having a healthy credit score can be very beneficial when it comes to getting a low mortgage rate. Generally speaking, the higher your credit score, the less you’ll be seen as a financial risk to mortgage lenders. In some cases, you may be able to qualify for a reasonable rate even with a lower credit score. Government-backed loans such as VA, USDA or FHA mortgages, usually offer good rates, even for people with less-than-perfect scores. However, they still may be higher than the rate you could get on a conventional loan if you improved your score.
2.) Maintain steady income and employment.
Lenders like to see a record of at least two years of steady employment, especially from the same employer. This shows that you are responsible, reliable and are more than likely to be able to continue making your mortgage payments on time. Borrowers who are self-employed or whose income fluctuates, may have a harder time getting a lower rate; however, it’s not impossible. There are other factors that can help you qualify for a lower rate, such as making a larger down payment or choosing a different loan structure (i.e., adjustable rate mortgage vs fixed rate mortgage). If you’re not sure which path to take, talk it over with a financial advisor or discuss the pros and cons of each option with your mortgage professional.
3.) Put 20% down.
In most conventional loans, borrowers will need to pay at least 20% down in order to avoid paying costly private mortgage insurance (PMI). PMI is a fee that lenders charge to insure the loan from loss in the event that you are unable to make your payments. While most lenders will accept much less than 20% down, the borrower will end up paying more in the long run — both through PMI and a higher interest rate.
4.) Consider a shorter term or adjustable rate loan.
The 30 year fixed rate loan is among the most common mortgage options available in today’s marketplace. However, it’s certainly not the only (or best) option for everyone. Many lenders offer 10, 15, or 20 year fixed rate loans in addition to the 30 year standard. These shorter term mortgages typically come with lower interest rates. There are also adjustable rate mortgages (ARMs) that offer very attractive rates for a set amount of time.
While shorter loan terms typically mean higher monthly mortgage payments, they can actually save you a lot of money over the life of the loan. In a short term mortgage, the borrower pays more toward the principal balance with each monthly payment. Plus, they’re able to pay the loan off much sooner (which also means paying less interest overall).
Be aware than ARMs typically offer a lower introductory rate that stays the same only for a short period of time and is then subject to adjustment. For example, a 5/1 ARM will offer a low introductory rate for the first 5 years, then the rate will adjust once a year for the remainder of the loan term.
5.) Move quickly and lock in.
Mortgage rates are expected to rise this year, so it’s important to move fast if you want to snag a great rate. Home prices are also remaining fairly high throughout much of the nation, which means what you pay in interest will be higher overall. If you’re able to follow the above steps and find a rate that works for your budget, it may be in your best interest to lock it in. Wondering how mortgage rate locks work? Take a look at our post on locking in a mortgage rate.