Buying a home is an important milestone for you and your family. You’ve worked hard, earned yourself a decent living, and now you’re ready to settle down and invest in a house of your own. Most of us aren’t lucky enough to be able to purchase a home outright, so that means getting a mortgage to finance your home. Hundreds of thousands of people have mortgages, but no two mortgage rates are created equal. Your rate depends on a variety of factors, such as credit score, income, and even which financial institution you get the loan from.
So how do you make sure you get the best rate possible? Here are 4 ways to make sure you get the best interest rate possible on your mortgage:
You Have Great Credit
It may seem like a no brainer, but the better your credit score, the lower your mortgage rate will be. Loans are priced according to what tier your credit score falls into, and every point counts. The typical score tiers are from 620 to 639, 640 to 659, 660 to 679 and so on. This means a mortgage rate offered to an individual with a credit score of 640 will be much better than the rate offered to someone with a 639. The difference of one or two points may seem trivial, but the fact of the matter is that these point differences can mean quicker loan approval, and with huge savings on your rates. Nurturing your credit score and making sure every payment is made on time and in full is your best bet for boosting your credit and getting a low mortgage rate.
You Put Down a Big Chunk of Change
Your initial investment into your home can greatly impact how much you spend over the life of your mortgage. Banks offer better interest rates when the loan-to-value ratio is smaller. A large down payment also shortens the timespan of your mortgage. With less money owed, the bank doesn’t feel as great of a need to secure its assets, and you will end up saving significant funds in the long run. Those who put down a large down payment also typically see their loans get approved much faster as opposed to those with smaller or no down payment.
You Have Sufficient, Steady Income
Showing your lender that you have a substantial, steady income will go a long way in reducing your mortgage rate. Financial institutions are risk adverse by nature. By proving you have a sufficient, steady income, a bank is more likely to trust you with a loan and provide you with a lower interest rate. Your income can also help you determine how much you should be spending on your home. The best way to estimate which price range you should be aiming for is to multiply your annual income by three to find the low-end limit, and then by four to find the high-end limit. So if you make $100,000 annually, it is reasonable to look for homes in the $300,000 to $400,000 range.
You Shop Around
Think about it, are you likely to find the best deal on anything the first place you look? To get the best quote from lenders, don’t be afraid to shop around. Be sure to provide the same information to each financial institution to ensure consistency in your quotes. Many fear that asking for multiple quotes will negatively affect your credit score, but according to FICO, all credit inquiries made within the same 30 day period prior to loan disbursement are not penalized. You will likely receive a 5 point hit to your score for the initial inquiry, but as long as you are diligent in your mortgage search, your credit score won’t take on any more damage.