There are many factors that determine what rate is available when you apply for a home loan, but there are only a handful of factors that you can control. While you can’t control the factors in the economy that set the mortgage rates, you can control the way you manage your finances which will affect the rates that lenders can offer you. In addition, you can do your homework on the types of loans that are available to you to make a more educated decision. Below are just a few things that you need to know to get the best rates on your mortgage:
1. Down Payment
The best rates are available to borrows who have more money to put down. We have found that putting down 20% or more will get you the lowest rates in the marketplace. So, if you're looking for a home, be frugal and save money whenever possible so that when the time is right, you will have more money available for the down payment!
2. Credit Score
When navigating the complexities of home loans, one important thing to keep in mind is: the higher your credit score, the lower your interest rate. This is because, generally speaking, lenders only want to lend money to people with better credit scores. If you pay your bills now and have consistently paid them in the past, then there is a good chance that you will continue to do so in the future (think of the expression, "the best way to predict the future is to look at the past."). Therefore, you are a lower credit risk and are rewarded with a lower interest rate.
3. Points
If the rate you are offered based on your financial profile isn't what you hoped it would be, there are other options. You can also buy what are known as points to improve your rate. To lower your interest rate, you can pay an up-front fee to buy down the rate. While buying points will cost more initially, you will pay less over the long term.
4. Custom Term Mortgages
If you really want a low rate and to pay off your loan fast, you can ask your mortgage professional if they offer custom term loans. While the standard term loan is 30 years, you can ask for shorter loan terms from most lenders. The rates on shorter-term loan are generally lower, but the monthly payments will be high. This is because the formula that determines the monthly payment is based on loan amount, interest rate, and loan term. This type of loan is not for everyone, but it works well for borrowers who have a higher income and want to build equity faster.
5. Adjustable Rate Mortgages
Perhaps the lowest rates that are available to borrowers are on Adjustable Rate Mortgages. Also known as ARM's, they have a low "introductory" interest rate, but the interest rate may vary over the term of the loan. However, these can be risky for borrowers that do not plan ahead for the rate increase.