In case you haven’t heard, mortgage rates are at an all-time low. But scoring the best deal requires more than just shopping around. If you want to take advantage of these historically low rates, then it’s important to understand what factors into the calculations. Here’s what you need to know in order to get the best rate for your unique situation.
Improve your credit score
If you want to qualify for the best rates, then you need to have an excellent credit score. When you have a good credit score, you could save thousands of dollars on your home over the life of the loan. You want to aim to have a score of at least 760. If your score is less than 760, there are ways you can improve it before you apply for a mortgage. Make all your monthly payments on time and pay down your debts like credit cards. Avoid taking out new lines of credit, which can lower your score. And be sure to get a copy of your credit report so you can check for errors. If you find any mistakes, then take the necessary steps to have them removed.
Buy a home that is affordable for you
Buying a home is one of the biggest financial commitments you will make in your lifetime. It’s important to limit your search to homes that fit comfortably in your price range. But the price of a home can also affect your interest rate. Loans that are $424,000 or less will have lower rates than those that are above that amount. These are known as “conforming” loans. If you live in an expensive area, then you may need to opt for a “super conforming” loan, which are loans that are $636,150 or less. The highest rates are charged to “jumbo” loans, which exceed the amounts of conforming or super conforming loans.
Make a large down payment
You can qualify for a home loan that requires you pay as little as three percent down (other loans, like VA loans, may require no down payment at all). But the more money you put down for a down payment, the better your interest rate will be. This is because lenders assume less risk when you pay more upfront. Lenders will charge higher rates when they have to take on more risk. Aim to pay at least 20 percent of the purchase price for your down payment.
Choose the appropriate loan product
The length of your loan can also affect your interest rate. You will pay a lower interest rate for a 15-year loan than you will for a 30-year loan. Again, this comes down to how much risk the lender will need to assume. You also have the option of choosing a fixed rate or a variable rate mortgage. While a variable rate mortgage will most likely have a lower rate to begin with, that number could go up significantly over the life of the loan. In addition, each type of loan product, such as an FHA, VA, or USDA loan, has different interest rates. You may score a great interest rate on these loans, but you must also meet strict income requirements.