Securing a low mortgage rate is very important for you whether you are buying your dream home for the first time or looking for a refinancing for renovations in your existing home.
Banks advertise their lowest mortgage rates but rarely give them to all their customers. You get a rude shock when you find that you will be charged a higher rate of interest because of various reasons. Even a quarter of a percentage point higher mortgage rate translates into a higher monthly installment. You end up paying much more than you would when you obtain a low-interest rate. In this article, we will talk about 8 simple and effective tips that can help you get a better mortgage rate.
1. Check And Improve Credit Score Before Applying
Nothing is more important for lenders than the credit score of the borrower. It tells them how trustworthy he is and how risky it is for the lender to finance the property for him. While you will get the mortgage with a credit score of 650, anything below 750 and lenders are hesitant to give a low mortgage rate. They want to cover their risk by increasing the mortgage rate. It is prudent to get your latest credit report from Experian and try to improve the score if you find it is not satisfactory.
2. Offer to Pay a Bigger Down Payment
A down payment is the amount of money that the lender asks the borrower to pay upfront when buying a home. This amount ensures that the borrower has stakes in the property he is buying. The higher the down payment, the more reassuring it is for the lender. You will get the mortgage even with a lower down payment but for a conventional loan, lenders will ask you pay for private mortgage insurance to safeguard their money. It is when you are putting at least 20% of the value of the property as a down payment that you can expect to get a more attractive mortgage rate from the lender. It is prudent to offer a high down payment if you can afford it as it increases the chances of securing a more attractive mortgage rate.
3. Lower Your Debt to Income Ratio
Lenders are at ease with a borrower who finds it comfortable to pay his monthly installments. They know chances of delay or skipping monthly installments are higher when the borrower manages payments with difficulty. Lenders judge your ease or difficulty with your loan-to-income ratio. Ideally, they don’t want this ratio to be more than 35%. It means that the EMI should not be more than 35% of the total monthly income. Try to lower this ratio by increasing your income to get a low mortgage rate.
4. Take Help of a Mortgage Broker
A vast majority of first-time homebuyers make the mistake of searching for a home first and applying for a mortgage later on. They believe they will easily get the mortgage as they earn a steady income. Applying for a loan at the 11th hour means they don’t have time to find a lender with the lowest mortgage rates. On the contrary, securing low-interest rates becomes easy when you hire the services of a mortgage broker. You should approach the lender through a mortgage broker like Altrua Financial to get assured low rates of interest. A mortgage broker has relationships with almost all lenders, and they also have full knowledge about various mortgage products offered by these lenders. You don’t need to worry about the fee of the mortgage broker as it is paid by the lender.
5. Get Rid of Your Debts
If you cannot increase your income, you can certainly get rid of various loans to reduce your debt burden. If the lender finds that you are already paying money for credit card balances and other items you have purchased in installments, he might decline your loan application or approve it with a higher mortgage rate. It is always a good idea to approach a lender with a clean slate to give him the impression of easy repayment of installments.
6. Shop Around For Mortgage
Don’t commit the mistake of approaching a lender and saying yes to his offer of a mortgage without exploring other options. These lenders are competing against each other to sell their mortgage products. They need good customers like you as much as you want a reliable lender. Apply for a mortgage with at least 3 lenders and choose the lender that offers the best terms and conditions to you. Don’t be afraid to bargain for a lower mortgage rate as it is your right as a customer.
7. Get Loan For Shorter Period
You see advertisements of lenders giving 20-year and even 30-year mortgages to their customers. Even though you can avail yourself of such lengthy mortgages, it is better to ask for a 15-year home loan if you want a lower mortgage rate. Banks are willing to lower their interest rates when they see their money being returned in a shorter period.
8. Opt For an Adjustable Rate of Mortgage
There are two types of interest namely ARM and a fixed rate of interest. Banks are willing to give a lower mortgage rate to customers opting for an adjustable-rate of the mortgage. You get the advantage of a low-interest rate for a few years after which the rate is adjusted according to the market rate. With an ARM, you pay a lower EMI in the beginning. You can pay extra EMI’s during this period to try and finish your mortgage earlier than its duration.
By obtaining a mortgage for buying a home or refinance, you commit to repay EMI’s to the lender for a long period. You can reduce your EMIs and the total amount you pay over time by being proactive at the time of applying for a mortgage. A higher credit score, higher down payment, and a lower debt to income ratio can help you in securing a low mortgage rate. A reliable and experienced mortgage broker can also get you low mortgage rates.