Getting the lowest mortgage rate is extremely important for homebuyers. Low mortgage rates save homebuyers and homeowners money on their monthly mortgage payments and help them afford the home that best suits their needs without breaking the bank.
So, here are six things homebuyers and homeowners alike can do to get the lowest mortgage rate.
#1 Monitor and Clean Up Your Credit Report
Cleaning up your credit report is critical when you are buying a home. The first thing to do is review your credit report and ensure it is accurate. If there are mistakes, work to correct them quickly so your credit score is as high as possible.
Though monitoring your credit report is a good idea, the months before purchasing a home or refinancing are especially important. Immediately address situations involving your credit report being pulled without your consent, stolen identity, or any mistakes on your report.
#2 Raise Your Credit Score
Here is a list of the common ways most borrowers can raise their credit score:
- Use credit, and use different types of credit.
- Judiciously apply for new credit.
- Keep balances low relative to credit limits.
- Don’t close old, unused credit accounts.
- Make sure bills are paid on time.
#3 Do Not Finance Closing Costs
Generally, you will qualify for a lower mortgage rate if you pay the closing costs rather than finance them.
With that said, many borrowers either do not have the cash or do not want to spend their cash to pay closing costs. Instead, they would rather buy a home wherein the seller pays all, or part, of the closing costs, or they would prefer to finance the closing costs.
It is crucial to remember that if you opt to finance closing costs, your mortgage interest rate will probably be a little higher.
#4 Lower Your Debt-To-Income Ratio (DTI)
Borrowers with a lower debt-to-income ratio (DTI) will almost always qualify for a lower interest rate on their mortgage. Therefore, paying down debt before applying for a mortgage can help you get a lower interest rate.
Lenders use the debt-to-income ratio to determine the type of mortgage for which a borrower qualifies and the interest rate. Therefore, it’s beneficial for homebuyers and homeowners refinancing a home to understand how the debt-to-income ratio works – both the front-end and back-end ratios.
#5 Make a Large Down Payment
Making a sizeable down payment is one of the best ways to get a lower interest rate on a mortgage. For lenders, home loans with a larger down payment are less risky than a loan with a low down payment.
To get the lowest interest rate, borrowers typically need a conventional mortgage with a 20% down payment. This mortgage comes with a lower interest rate and does not have the funding fees and insurance payments associated with low down payment mortgages.
#6 Increase Your Cash Reserves
When applying for a mortgage, your cash reserves are measured as the monthly house payments you have in savings.
Money that counts toward your cash reserves includes money in various savings accounts, such as money market accounts and CDs. In general, money in retirement accounts or an account you can’t withdraw without paying taxes or penalties is not counted toward cash reserves.
Typically, lenders required borrowers to have two months of cash reserves, meaning they could pay the mortgage for 60 days without additional income. However, borrowers with a higher-risk loan, such as a jumbo loan, may be required to have more than two months of cash reserves.
#7 Monitor Mortgage Rates
Mortgage rates constantly fluctuate. If you are monitoring mortgage rates, you can prepare to take advantage of a potential rate drop by knowing what rates have been doing.
When the mortgage rates are at a level you can afford, ask your lender to lock in your mortgage rate, so if the market fluctuates during your application process, you will be spared from paying the higher rates should they increase.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in mortgages for first-time homebuyers, conventional home mortgages, refinance loans, reverse mortgages, and FHA, VA, and USDA mortgage options. In addition, we’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.