With mortgage rates rising, it’s important for borrowers to know how they can secure the lowest interest rates possible. Why? Because a rate even a fraction of a point lower can save you thousands of dollars over the life of your loan.
Here are strategies you can use to secure the lowest interest rates on your next mortgage loan.
Work on Your Credit Score
How well you manage your credit obligations directly affects your interest rate. Higher credit scores signal lower risk, allowing you to enjoy lower rates. Rates on mortgages for those with bad credit tend to be quite a bit higher.
Pull your credit and dispute any errors you find. From there, make all your payments on time every month, as it’s the easiest way to strengthen your credit score. In addition, pay down your credit cards (if you carry a balance on them) and avoid opening any new credit accounts while you’re trying to get approved for a loan.
Pay Down Your Debts
Lenders look at your debt-to-income (DTI) ratio when calculating the interest rate you qualify for. This ratio compares your debt load to your income. If you can pay down your debts, the ratio is more appealing and typically snags you lower rates on your mortgage loan.
Save a Bigger Down Payment
Filling up that piggy bank can save you on interest rates when you’re buying a home. Larger down payments equate to less risk on lenders, so you benefit by gaining access to lower interest rates.
Decrease Your House Budget
If you aren’t in a position to put more into your down payment, think about chopping your purchasing budget. Borrowing less money looks less risky to lenders. Plus, since down payments are typically measured as a percentage of the home’s price, lowering your budget may help you qualify for better rates.
Consider Buying Points
You can pre-pay interest at the closing table to lower your overall interest rate. Your lender can run the numbers and tell you if this idea is an effective strategy that will benefit you in the long run. (Most of the time, you’ll need to stay in the home for several years for this to be worth the cost.)
Opt for a Shorter-Term Loan
Shorter-term loans almost always offer lower interest rates. If your budget can handle it, choose a 10-, 15- or 20-year mortgage loan over a 30-year loan. This decision will net you a lower interest rate and save you money on your mortgage.
Don’t let rising interest rates scare you out of your homebuying plans. High credit scores, a bigger down payment, a lower debt load, choosing to buy points, and using a shorter-term loan can help you keep interest rates reasonable. By using these tips, you can still get into a home with a decent interest rate that fits into your budget.