8 tips for getting the best interest rate on your mortgage
When it comes to buying a home in Rhode Island, securing the best mortgage rate can lead to substantial savings over the life of your loan. A mortgage is a legal agreement between a borrower and a lender that provides the borrower with the funds needed to purchase or refinance a home. If a borrower doesn’t repay the loan consistent with the terms of the agreement, the lender has the right to take the property. By understanding how to secure the best mortgage rate, you can potentially save thousands of dollars, making your dream home more affordable.
Applying for a mortgage is a significant step in your financial journey. The most common loan term is a 30-year fixed-rate loan, which means you’ll be committed for a long time. This is why it’s crucial to strive for the best interest rate possible. While mortgage rates are influenced by various economic factors, there are practical steps you can take to secure a favorable interest rate based on your lifestyle and priorities.
How does my credit score impact my mortgage rate?
Your credit score is a key factor in determining the interest rate you’ll qualify for. It’s not just a number but a reflection of your financial responsibility. Aim for a credit score of 620 or higher to be considered for a conventional mortgage. However, the best mortgage rates go to borrowers with scores of 740 or above. To improve your credit score, consider these 8 tips:
1. Make your payments on time
Making your payments on time is crucial because your payment history is considered the best indicator that you will repay all your debts. Late payments, even a few, can have a negative impact on your credit score. According to MyFICO.com, payment history is the biggest score factor, so it’s important to pay close attention to it and make sure your bills are paid on time. Setting up autopay is a good idea so you never miss a payment.
2. Limit credit report inquiries
Limit the number of inquiries on your report by making it clear to lenders or creditors not to run your credit unless given authorization. The only inquiries that count toward your FICO score are the ones that result from an application for new credit.
3. Avoid account collections
Avoid collections, and remember that paying off a collection account will not remove it from your credit report. It will stay visible for up to seven years.
4. Keep credit card balances low
Keep credit card balances low, between 20% and 30% of your available credit limit. Multiple credit cards with high balances indicate that a borrower may be overextended.
5. Do not close credit accounts
Do not close accounts; it affects your credit age history and credit use percentage. The credit utilization ratio looks at your total used credit in relation to your total available credit.
6. Check your credit report twice a year
Check your credit report at least twice a year for inaccuracies. The most frequent complaint the Consumer Financial Protection Bureau (CFPB), receives is incorrect information on consumers’ credit reports; generally, these errors are not in the consumer’s favor; instead, they make them look more risky to lenders.
7. Do not exceed your credit limit
Do not exceed your credit limit and only borrow what you can afford. While this may seem obvious, often consumers will use credit because they can’t afford what they want.
8. Check your credit report for errors
Regularly check your credit report for errors and correct them before applying for a mortgage in Rhode Island. According to the CFPB, you have the right to request one free copy of your credit report each year from the three major credit bureaus. You can access these reports by going to AnnualCreditReport.com.
Does my down payment amount affect my mortgage interest rate?
You will see a lot of information about how you do not need 20% of the sales price for a down payment on a home, and that is true. There are many loan programs that borrowers can take advantage of that will let them purchase a new home with less than 20%.
- FHA loans are backed by the federal government and have a minimum down payment of 3.5% of the home purchase price.
- HomeReady loans (Fannie Mae) have a minimum down payment of 3% of the purchase price.
- Home Possible loans (Freddie Mac) have a minimum down payment of 3% of the purchase price for a single-family home.
- VA loans have a no down payment requirement for most borrowers with full VA entitlement.
- USDA loans have a no down payment requirement for eligible rural homebuyers
However, it is still true that a larger down payment not only reduces your loan amount but may make you eligible for a better mortgage rate. If possible, aim for at least 20% of the home’s purchase price.
What do I need to know about debt-to-Income ratio and my mortgage rate?
Lenders assess your debt-to-income ratio (DTI) to determine your ability to manage debt. Keep your DTI below 43% for the best rates. Pay off high-interest debts to improve your ratio. DTI is the percentage of your total debt payments divided by your gross income (before taxes). It’s usually expressed as a monthly or annual figure. Lower DTI ratios are better for eligibility and getting the best mortgage rate.
DTI = (Total monthly debts / Gross income) × 100
How does buying mortgage points affect my mortgage rate?
Mortgage points allow you to buy down your interest rate by paying upfront fees. Each point costs 1 percent of the mortgage amount. Buying points effectively helps you lower the mortgage interest rate. If mortgage rates are running higher, buying points could be a solid strategy if you have the money available upfront. Keep in mind a good rule of thumb is that 1 point will reduce the mortgage interest rate by 0.25%.
What is a mortgage rate lock?
Once you find a favorable rate, consider locking it in. Mortgage rates can fluctuate throughout the day, so securing your rate ensures you won’t miss out on a good deal and will get the best mortgage rate available to you at the time you lock. Mortgage rates can change frequently, so if you find one you can live with comfortably, that might be the best mortgage rate for you! Getting a rate lock is the only way to ensure your rate will not change.
Mortgage Equity Partners has a program called “Lock to Shop” that will allow you to lock your rate while you are still looking for a home. With this program, you will submit an application, receive a fully underwritten loan commitment from an underwriter, and can lock in the rate available at the time. While you may still get someone “rate shaming” you if they have one of those 2020-2021 rates, the rate lock protects you if rates go up during your search. Best of all, if the rates decrease by 0.25% during your home search, you will be entitled to a one-time rate reduction at no additional cost.
Remember, getting the best mortgage rate in Rhode Island involves a combination of financial discipline, research, and strategic decision-making. By following some of these steps, you’ll be well on your way to homeownership with a mortgage interest rate you can live with for a long time. Our experienced local lenders can advise you on how to get the best interest rate for you! Contact a loan officer today.
Sources:
https://www.consumerfinance.gov/
https://www.myfico.com/
