Expanded Lesson 6 min read
May 16, 2022
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For homeowners, a common financial goal is to pay off the mortgage as soon as possible and avoid paying extra interest. The lower the interest rates, the less you will owe down the line. That’s why it’s important to find a loan with the lowest possible interest rates, usually represented as annual percentage rate (APR), and other fees associated with the lending process. Use this guide to help you find the best mortgage rates to save money over time.
LESSON CONTENTS
Understanding the Application Process
Whether you’re looking to buy your first home or refinance your home, there’s a lot you can do to improve your mortgage rates. To get the best mortgage rates, you have to understand the lending process. The first step is to fill out a mortgage application. Financial institutions will look at your credit report when evaluating your application. There are three main factors for them to consider: your debt-to-income ratio, credit score and assets. They will use this information to determine the potential risk of lending you money.
The stronger your application, the better the mortgage rates. Lenders often charge higher interest rates to borrowers with lower credit scores as a way of reducing their risk of default. That’s why it is important to have a good credit score—it puts you in a position to get a better rate.
How to Get the Best Mortgage Rates:
Now that you understand how the factors that help determine mortgage rates, it’s time to start improving your application. Let’s take a look at all the factors:
Improve Your Credit Score
Your credit score represents your ability to pay back your loans on time. It includes financial information, including your credit card, income and debt history as well as regular payments such as rent, utilities and insurance. Scores range anywhere from 300 to 850. They are issued by one of the three major credit reporting agencies, including Equifax, Experian and TransUnion.
If you’re late on monthly payments or fail to repay your debts on time, expect your credit score to take a hit. Start making regular, on time or early payments to improve your credit score. Set up automatic payments, so you don’t have to worry about forgetting to make a payment. Request a free copy of your credit score to get a better idea of your standing as a borrower. Review your credit report to make sure it’s accurate and contact the reporting agency to correct any errors.
Improve Your Debt-to-Income Ratio
This figure represents your ability to handle your monthly payments and repay your loans. Lenders will subtract your outstanding debt payments from your existing income and/or savings to see how much you can afford to pay every month. Do your best to increase your income and/or pay off your debts to lock in better mortgage rates.
Lenders will also look at your employment history to make sure you have income security. Banks and credit unions often ask for pay stubs from the last 30 days as well as W-2s from the last two years.
You may be able to get approved with a job offer if you’re just starting your career or if you have remained in an industry but changed employers as long as the offer stipulates what you’ll be paid. Self-employed individuals often have a harder time getting approved than those with a salaried position. If you work freelance or per diem, the lender may ask for business records to verify your income.
Take Advantage of Special Programs and Discounts
Many states offer various programs to first-time homebuyers, including down payment assistance, low interest rates and reduced closing costs. Do some research or check with a local lender to see what mortgage programs are available in your area.
Pay for Discount Points
Some lenders offer discount points to borrowers. The idea is that you pay a fee upfront to reduce your interest rates down the line. For example, you may be able to pay a fee equal to 1% of the home’s value to shave down your interest rates by 0.25%. This can be effective for some borrowers, but the cost of the upfront fee may outweigh any potential savings on interest. Be sure to calculate the potential savings before signing up for these programs to make sure they will benefit you in the end.
Increase the Down Payment
One of the best ways to lock in lower interest rates is to increase the size of the down payment. Lenders and states often have different down payment requirements. In some areas, you may be asked to pay as much as 20% of the home’s value upfront, while other lenders will let you get by with just a 3.5%. FHA mortgage loans require just 3.5% down payment, while VA loans will let you buy a house with a zero down payment. If you put less than 20% down, you will need to pay mortgage insurance each month until your equity reaches 20% (not required for VA loans). Increasing your down payment to 20% or more will eliminate this expense.
Try to increase how much you can pay upfront to lower your interest rate. This reduces how much debt you have to take on in the first place. The lender won’t have to take on as much risk, and they will usually pass those savings on to you. You might have to wait a year or two until you have saved more money. You can also shop for a less expensive home to increase your down payment.
Find a Lender with the Best Mortgage Loan Rates
Different types of lenders tend to offer different types of mortgage rates. For example, credit union mortgage rates tend to be lower than those you’d find at a bank. Research different lenders to find the best possible mortgage rates. Analyze the loan estimate to make sure you understand the full cost of the loan, including closing costs and borrowing fees. You will also have to choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM). Adjustable rates mortgages usually offer a lower rate upfront, but it will go up after the first few years. This may be a good option if you plan on paying off your home within the first few years. Otherwise, you may be better off with a fixed rate.
Contact the mortgage loan officers at Ent to learn more about how to lock in the best mortgage rates. A few changes can help you save thousands of dollars down the line.
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I'm an expert in personal finance, particularly in the realm of mortgages and homeownership. My expertise is backed by a deep understanding of the factors influencing mortgage rates and the strategies individuals can employ to secure the best rates. Now, let's delve into the key concepts presented in the article.
The article focuses on guiding homeowners towards paying off their mortgages efficiently by securing the best possible mortgage rates. Here are the main concepts discussed:
-
Understanding the Application Process:
- Emphasizes the importance of a strong mortgage application.
- Factors considered by financial institutions: debt-to-income ratio, credit score, and assets.
-
How to Get the Best Mortgage Rates:
- Strategies to improve mortgage application:
- Improve Your Credit Score:
- Importance of timely payments and debt management.
- Credit score ranges from 300 to 850.
- Suggestions to enhance credit score, such as setting up automatic payments and reviewing credit reports.
- Improve Your Debt-to-Income Ratio:
- Explanation of how lenders assess the ability to handle monthly payments.
- Advice to increase income or pay off debts for better rates.
- Consideration of employment history.
- Take Advantage of Special Programs and Discounts:
- Mention of state programs for first-time homebuyers.
- Pay for Discount Points:
- Explanation of upfront fees to reduce future interest rates.
- Caution to calculate potential savings before opting for these programs.
- Increase the Down Payment:
- Significance of a higher down payment in securing lower interest rates.
- Variation in down payment requirements by lenders and states.
- Find a Lender with the Best Mortgage Loan Rates:
- Different types of lenders may offer varying rates.
- Importance of analyzing the full cost of the loan, including closing costs.
- Choice between fixed-rate and adjustable-rate mortgages.
- Strategies to improve mortgage application:
-
Additional Information:
- Mention of credit union mortgage rates potentially being lower than those at a bank.
- Encouragement to contact mortgage loan officers for personalized guidance.
This information provides a comprehensive guide for homeowners seeking to optimize their mortgage rates and ultimately save money over time. If you have any specific questions or if there's a particular aspect you'd like to explore further, feel free to ask.
