6 Sure-Fire Tips to Get a Lower Mortgage Rate
It’s understandable why borrowers think that the best way to get a lower mortgage rate is to pick a lender who advertises the lowest rate. Mortgage companies know that, and they try to differentiate themselves from competitors by advertising the lowest possible rate they can offer the most qualified borrower.
Comparing the rates lenders advertise does not mean the one advertising the lowest rate will be best for you. What most borrowers don’t realize is that they have the power to lower their mortgage rates.
Lower risk means a lower rate
Many factors determine an individual borrower’s mortgage interest rate. Lenders are in the business of managing risk. Riskier loans are less attractive to investors, so lenders must offer mortgages at a higher rate. The higher the risk, the higher the cost to the lender, who passes along the cost to borrowers in the form of higher interest rates.
The super low rates borrowers advertise are usually reserved for borrowers with the best credit scores and the best credit history. However, some mortgage lenders can offer lower rates than others because the cost of borrowing money to lenders varies by their access to capital.
Borrowers can make their mortgages less risky and get better rates by reducing the lender’s exposure in other ways. They can reduce the size of the loan compared to the property’s value or reduce the amount of debt they are carrying to make it easier to make their mortgage payments. Some lenders even offer better rates to buyers who take a certified homeownership education course that teaches them how to manage debt successfully.
Better credit can save thousands in interest
The best way to lower your mortgage rate is to improve your credit score. FICO and the other widely used credit bureaus, TransUnion and Equifax, organize credit scores into one of five brackets separated by 50 points that range from “Bad” (FICO score below 600) to “Excellent” (FICO score 750 or better). FICO, which creates the most widely used credit score, has an excellent calculator that shows you how much interest you will save with a better score. If your score is 675 and you add ten points, your rate would fall from 4.73 percent to 4.659 percent, and you would save $11,609 over the life of a $250,000 mortgage.
Six ways to lower your credit score:
Check your credit score for errors.
The three top credit bureaus are the leading sources of credit information about credit histories and credit scores. They rely on information from lenders and retailers to keep data current. Sometimes reports are incomplete or contain information about someone else due to clerical errors or inaccurate information from a borrower. A 2012 study by the Federal Trade Commission found that one in five consumers had an error on at least one of their credit reports. You might be able to improve your score quickly if it contains an error. You are entitled by law to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies.
Should you find one or more errors in your credit reports, ask the credit bureau to change the information that is erroneous and include proof that the information is wrong. For example, provide a copy of a canceled check or bank statement to show that a bill was paid on time. The credit reporting company must check it out and respond.
Raise your credit score.
Many personal finance sites contain extensive information on how to improve your credit score by adopting better spending habits. Here is a summary of some of the most effective tactics:
- Begin by paying any overdue or delinquent accounts as fast as you can. Ask your credit card issuer or lender if they can forgive a late payment. Late payments can be reported for up to seven years from when the delinquency occurred.
- If you have no credit history or if your score is below 650, get a secured credit card, which is a card that you prepay, so you don’t need credit to get one. Use it to establish a better payment history. Your payment history is 35 percent of your FICO score.
- If you have several revolving accounts, instead of paying them off one at a time, pay down the balance on all of them each month. Get your balance on all cards down to 23 percent or less of your limit for all accounts (your statements for each card will tell you your credit limit as well as your current balance. The amount of debt on your revolving accounts is 30 percent of your FICO score.
- Immediately get in the habit of paying more than the minimum on your revolving accounts and use cash rather than credit for your daily purchases.
- Don’t cancel any credit card accounts, even if you don’t use them. Be sure to keep the oldest credit card you have and keep its balance low or at zero. Good average age of credit history is five years and up. The longer your positive credit history, the better the credit scores may be.
- You can lower your credit utilization rate by opening a new account, and you should open a new account if you close one of your existing accounts. Ideally, your credit utilization rate should be 30 percent or less of your available credit. Bear in mind that when you apply for new credit, the lender will do a “hard” check of your credit, which will temporarily lower your credit score by five to ten points for as long as a year.
Shop for a lender.
Most borrowers don’t shop for a lender that will give them the best rate. The “know before you owe” initiative at the Consumer Financial Protection Bureau makes it easy to compare all the costs of borrowing from a lender, including rate and payment schedule. Lenders must send the estimate to you within three days of receipt of your mortgage application. Apply to at least three lenders simultaneously to see what rates you would get. Even though these applications will trigger a “hard check” of your credit by each lender, if you limit your shopping to a two-week period, it’s likely those applications will only count as a single inquiry. That’s because most scoring models count all inquiries of one of those types as one, provided they take place within a 14- or 45-day period.
Make a larger down payment.
Banks and lenders usually offer better interest rates when your loan-to-value ratio is lower. An increase in your down payment lowers this ratio and also lowers the lender’s risk because most lenders practice risk-based pricing. Lower interest rates can save you significant amounts of money over the life of a mortgage. Making a larger down payment also reduces the amount of interest you will pay over the life of the mortgage because the amount you borrow will be smaller.
Pay a point or two.
If you’ve got a little extra cash, paying a point may deliver more bang for fewer bucks than increasing your down payment. Mortgage points are fees you pay to your lender at the time of closing in exchange for a reduced interest rate on your loan. The mortgage lender benefits by receiving cash upfront instead of collecting interest payments over time. One point is 1 percent of the loan amount. A 30-year, $150,000 mortgage might have a rate of 3.5 percent rather than 4.5 percent if the buyer paid one mortgage point, or $1,500. Borrowers typically can pay anywhere from zero to three or four points, depending on how much they want to lower their rates.
Set up automatic mortgage payments.
Lenders, especially those that are depository institutions like banks or credit unions, are sometimes willing to give their existing customers a better deal on a mortgage interest rate if they sign up for automatic monthly payments. Not only are payments on time, but current customers have an incentive to stick with the bank. Should you close your account or change banks, your original lending bank could remove the interest rate discount.
Home buyers need not feel powerless over rising interest rates. They may have more control over the rates they will pay than they realize.