Buying a home may be one of the biggest financial decisions you’ll make in your lifetime, and you will likely need a mortgage to fund the purchase. Especially in a high-rate environment, it’s crucial to position yourself for success in obtaining the lowest and best possible mortgage rate.
Even small differences in your interest rate can significantly impact your monthly payment and the total amount you’ll pay over the loan’s term. To help you achieve the lowest mortgage rate possible when buying your first home, here are eight strategies to consider.
- Improve your credit score
If you’re looking to secure the best possible mortgage rate, it’s crucial to focus on improving your credit score. Although interest rates are also influenced by other factors, such as market conditions, improving your credit score is the most effective way to reduce your mortgage rate.
A higher credit score can help you qualify for lower interest rates and monthly payments. To boost your credit score, start by reviewing your credit report. Additionally, limit hard credit inquiries and make sure you pay your bills on time, every time. While a high credit score is ideal for mortgage approval, some affordable lending programs accept lower scores, so research your options to find the best fit.
- Reduce your debt-to-income (DTI) ratio
To qualify for a lower mortgage rate, focus on reducing your debt-to-income (DTI) ratio. Lenders use this ratio to assess your ability to repay the loan. If you have a heavy debt burden, your lender may consider your financial situation risky and charge a higher rate.
The lower your DTI, the more attractive you are to lenders, as it indicates that you can afford a new loan payment without overextending your budget. Conversely, a higher DTI means that you’re putting more of your income towards loan payments, making it challenging to afford additional debt. To reduce your DTI, consider paying off certain debts, i.e. credit cards, to free up more funds to allocate toward your monthly mortgage payment.
- Save for a bigger down payment
To lower your mortgage rate and monthly payments, consider making a larger down payment. By putting more money down, you will owe less on the loan and have more equity in your home right from the start. This means you’ll need to pay less principal, which is the amount you owe on the loan without interest. Additionally, you’ll pay less interest over the life of the loan since it is calculated based on the principal owed.
While some loans offer low down payment options, a larger down payment can reduce your mortgage rate and monthly payments. When you make a smaller down payment, lenders view your loan as riskier, and may require a higher interest rate. Therefore, putting a larger down payment will lower your interest rate and reduce the total cost of your loan.
- Shop around
According to a study by Freddie Mac, homebuyers who obtain at least two mortgage rate quotes can save as much as $600 annually. Those who get more than four quotes could save an average of more than $1,200 annually. Make sure to carefully compare your options and consider your personal situation when selecting a lender.
- Consider first-time homebuyer programs
To get the lowest possible rate on your mortgage, consider exploring first-time homebuyer programs. You can take advantage of government and community mortgage programs that offer lower interest rates and other home-buying incentives, such as cash grants for closing costs and forgivable loans for down payments. There are over 2,000 homebuyer assistance programs available nationwide, so be sure to research all the options available in your city or state.
For example, you might be eligible for special programs like the Downpayment Toward Equity Act, which provides up to $25,000 in assistance for first-generation homebuyers, or the House Charlotte program, which offers up to $10,000 in forgivable loans for eligible first-time homebuyers in North Carolina. By exploring these programs, you could save money and qualify for a lower interest rate on your mortgage.
- Pay for mortgage discount points
By paying an upfront fee, you can lower your mortgage interest rate, saving money in the long run. Typically, one point costs 1% of your mortgage amount, and each point can lower your interest rate by one-eighth to one-quarter of a percent.
The key is to make sure you plan on staying in your home long enough to recoup the cost of the points. If you plan on staying in the home for several years, buying mortgage points can be a good way to save money on interest. Just be sure to compare the costs and benefits of paying for points versus not paying for points to ensure it makes sense for your specific situation.
- Apply for a shorter loan term
If you want to lower your mortgage rate, consider opting for a shorter loan term, such as a 15-year loan. Short-term loans are less risky for lenders, resulting in lower interest rates than longer-term, 30-year loans. Although monthly payments will be higher with a shorter loan term since you’re paying off the principal in a shorter time, you’ll ultimately save more money in the long run.
Longer-term loans may offer lower monthly payments but at a higher interest rate, meaning you’ll end up paying more over the life of the loan. If your priority is to secure the lowest possible mortgage interest rate and save money over the long term, a short-term loan is the way to go.
- Do a temporary mortgage rate buydown
A mortgage rate buydown is a great way for homebuyers to secure a lower interest rate for a fixed number of years. This means that for a limited time, the initial rate will be lower, giving borrowers reduced monthly payments during the early years of the mortgage.
By opting for a buydown plan, homeowners can save thousands of dollars in interest over the loan’s lifetime. When the specified period ends, the mortgage rate will gradually increase each year based on the chosen buydown program. The 3-2-1 buydown, 2-1 buydown, 1-1 buydown, and 1-0 buydown are common options for temporary buydowns.
The bottom line: Preparation is key
Most of the work involved in getting a lower mortgage rate happens long before you’re ready to apply for a loan. Ensuring you have a good credit score and a substantial down payment are the best ways to lower your rate.
It’s important to not rely solely on your bank, realtor, or mortgage broker to find the best terms for you. Take the time to shop around, compare rates, and calculate the potential savings. By taking these steps, you’ll be well on your way to securing a mortgage with a lower interest rate, saving you money over the life of the loan.
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