When it comes to your mortgage rate, a 0.5% difference may not seem like a lot right now but over 30 years that amount can translate into thousands of dollars spent or saved. For this reason, the mortgage rate that you are able to secure is a very important factor when you are buying a home. Below are some tips which will help you receive the best mortgage rate possible.
Understanding your Debt-to-Income Ratio
You will need to make sure your debt-to-income ratio does not rise above 36% for most lenders. This means that you are able to payoff all of your mortgage, other loans, and credit cards with no more than 36% of your monthly income. If this is not true for you yet, start paying down some of your credit cards and loans as soon as possible.
Improving your Credit Score
You want to try and get your credit score to at least 740 as borrowers with this credit score or higher see the lowest mortgage rates. There are a few ways you can improve your credit score; something as simple as paying your bills on time goes a long way. You will also want to make sure that you don’t apply for any credit cards or other loans for at least sixth months before applying for your mortgage. If you do have credit cards with a balance it is important that the balance only reaches 20% of what you are allowed to borrow. Keep in mind that installment loans (i.e. student loans) look better during a credit check than credit cards.
Consider a 15-Year Mortgage
A 15-year mortgage can decrease your mortgage rate and save you money over time even though you may have to pay more monthly. It is important to remember that having a 15-year mortgage doesn’t mean you double your monthly payments; however, it could mean that you will see a decrease in your rate up of up to 0.8%. Over 15 years, that could be a sizable savings.
Fixed vs. Adjusted
If you think you will be selling your home soon you should consider an adjusted mortgage as they can offer the lowest rates. A 5/1 adjusted rate means that it will remain at the low rate for five years but will change from there. This type of mortgage can become very costly though depending on the market. If you decide to do the adjusted rate make sure that you are able to afford the higher payments if you don’t sell your home in those five years.
There are many steps you can take to help lock in a lower mortgage rate. Before agreeing to a rate make sure that you have researched all of the available options and put yourself in the best position. Doing this work up front could save you thousands in the long run.