14 Steps to Take for the Best Mortgage Rate Despite Interest Rate Hikes
Many people depend on loans to buy houses. You need all the help you can get. With rising mortgage rates, getting the lowest possible interest rate is of the highest importance.
If you’re looking to buy a house, you need the right information on mortgage loans and their interest rates. Most importantly, you need to get the best mortgage rate. These are questions about how to become a house owner.
The first thing you need to know is the affordability of the house you intend to buy. A mortgage calculator helps you estimate monthly mortgage payments and the loan’s interest rate. With this basic knowledge, you’re on the right path already.
Fortunately, all you need to know concerning mortgage rates are in this post. Information such as debt-to-income ratio, credit scores, and closing costs are also detailed.
Read on to discover steps you can take to get the best mortgage rates.
14 Steps to Take to Get the Lowest Mortgage Rate
The worst mistake you can make is to go in blindly while seeking a mortgage for your home purchase. To get the best mortgage interest rate, you must follow these steps that are carefully explained here. At this point, all the cards are in your hands.
Here are 14 steps to get the best mortgage rate:
- Boost your credit score
- Know your income history
- Build your savings for a down payment
- Weigh up short-term loans
- Pick your mortgage type: FRM or ARM
- Learn your debt-to-income ratio
- Consider discount points
- Review closing costs
- Compare mortgage rates from multiple lenders
- Observe mortgage rates
- Apply the use of a mortgage calculator
- Make inquiries on first-time home buyer grants and programs
- Make inquiries on private mortgage insurance (PMI)
- Don’t be in haste to make big decisions
1. Boost your credit score
The first step to take in getting a suitable mortgage is to boost your credit score. This step matters greatly because it determines the interest rates you can receive from lenders. Also, it determines how much you pay down the line.
To improve your credit score, you need to check your credit report. Fortunately, credit bureaus such as Experian offer this service.
Experian.com provides a free account that offers your FICO Score of 8. Also, you get tips on improving your credit score. Also, a paid account at Experian.com provides your FICO Score of
Note that your FICO Score of 2 is the preferred credit score for most mortgage lenders.
With a higher credit score, you can apply for loans and receive lower interest rates. Lenders see people with high credit scores as less risky borrowers. If your finances are poor, it is best to postpone your dreams of owning a house.
So, how do you improve your credit score? Paying off your bills and credit card balances on time contributes to having a higher credit score. It is also important to have a low debt balance.
A 20-30 point difference can remove 0.25% from your interest rate. With this reduction, you could save up to thousands of dollars in mortgage payments. Undoubtedly, having a bit of extra money is always beneficial to your finances.
Moreover, a good credit score helps you get lower insurance rates on your mortgage. It is best to aim for a credit score of 760 or above when applying for a mortgage.
2. Know your income history
It is common for lenders to seek out your income history. Essentially, they consider two years of steady income as an attractive trait in borrowers. Most especially if your income is from a single employer; besides, your income and earnings history show you can afford your loan payment over time.
Lenders will ask for your W2 forms and maybe your tax reforms. These forms show lenders your proof of employment. Sometimes, they make enquires to your employer to ascertain your employment history. If you have gaps in your income history, lenders will doubt your ability to pay your mortgage.
Self-employed borrowers also face this issue. It is more difficult to qualify for mortgage loans if you’re self-employed. Besides, receiving higher interest rate loans shouldn’t surprise you. This occurrence is due to lenders being stricter with self-employed individuals. You might also need to provide business records and account statements.
For newly employed persons, a formal employment offer is okay for verification. It won’t be a problem since your offer shows your potential earnings. However, you can get disqualified if you’re switching job industries. Ensure you consider these facts before switching careers.
Note that a gap in your employment history isn’t a disqualifying factor. But the length of those gaps determines your loan qualification. A mortgage lender might ignore short gaps caused by illness, but a longer period might cause disqualification.
3. Build your savings for a down payment
One important step to take is to save up for a down payment. A down payment is a fee you pay upfront for a home. If you have more money for a higher down payment, you will receive a lower mortgage rate.
For instance, if you pay more than the usual 20% down payment, your interest rate could reduce by over 0.5%. However, you can still pay less than a 20% down payment.
Paying a lower down payment means you’ll pay PMI. The disadvantage of insurance premiums is akin to a higher interest rate. Hence you’d have to pay a higher monthly payment.
To avoid this pesky situation, save up for a larger down payment. If you can pay a 20% down payment, you wouldn’t pay PMI. Also, it will help you obtain a lower interest rate for your home loan amount.
A larger down payment encourages the lender to offer you lower mortgage rates. This strategy makes the lender consider you as a less risky borrower.
Here are some loans you might be eligible for:
These loans are for veterans or active military personnel. Also, spouses of military personnel are eligible for this loan.
These home loans are eligible for rural residents. Additionally, the department of agriculture covers closing costs and offers a low down payment.
The Federal Housing Administration insures these loans. They allow a down payment of up to 3.5% for people with low credit scores. However, you have to pay for mortgage insurance through the life of the loan.
You can apply for a conventional loan with a 3% down payment. Such loans aren’t issued by the government and charge for PMI. However, you can cancel the PMI in possession of 20% equity.
A jumbo loan is a mortgage loan that exceeds limits set by the Federal Housing Finance Agency. They are loans used to finance investment property that cost over $647,200. They are also known as non-conforming loans.
4. Weigh up short-term loans
A shorter loan term is always advantageous in the long term. For most borrowers, 30-year and 15-year fixed-rate mortgages are common. A 30-year fixed-rate mortgage loan term gives you 30 years to pay off your loan. Clearly, this option seems satisfactory to the average individual.
This is due to the time frame and the little monthly payment option.
However, if you’re looking to get a lower interest rate, a shorter loan term is what you need.
This loan choice helps you cut down the interest rate and save money. Additionally, there are mortgage companies that even offer shorter loan terms.
5. Pick your mortgage type: FRM or ARM
A mortgage can have a fixed or adjustable rate. A fixed-rate mortgage locks your principal and interest rate over the course of your home loan. In simpler terms, it retains a constant interest rate throughout the life of the loan.
Adjustable-rate mortgages tend to have flexible interest rates. They typically start with an introductory period which can range from 1-10 years, which makes your interest rate fixed. After the introductory period, the mortgage rate changes occasionally.
ARMs typically provide lower interest rates, but they tend to rise after that period is over. This occurrence can make you have larger monthly payments. For long-term loans, a fixed-rate mortgage seems advisable. However, contact a mortgage broker for advice on the type of mortgage rate that suits your finances.
6. Learn your debt-to-income ratio
It is important to know your debt-to-income ratio DTI. Lenders want to see if you won’t default on your monthly payments. Additionally, they want to know how your debt compares to your monthly income.
Lenders review your DTI by examining your employment and earnings history. This review process helps determine your mortgage rate. It is also why you might get better competitive rates than self-employed borrowers if you apply for a full documentation loan.
There are two formulas used to evaluate a borrower’s DTI: namely, “front-end ratio” and “back-end ratio.” Your front-end ratio is a combination of your housing costs such as monthly mortgage payments, property taxes, etc. Finally, your gross monthly income splits up the total sum.
Whereas the back-end ratio is different as it involves your total debts. Your back-end ratio is a combination of your monthly payments and debts such as car loans and credit cards. It also includes your mortgage payment. And then, your GMI divides the total sum.
Without a doubt, lenders presume a higher DTI ratio to mean you’re likely to default on your loan. Lenders tend to prefer a maximum front-end ratio of 28% and a back-end ratio no higher than 36%. However, there are loan services that offer loans despite your high DTI, such as FHA loans.
To increase your qualifications for loans, increase your income. A higher income and less debt are qualifying traits for mortgage applications. With such finances, you can get a lower interest rate. It also shows your consistency in your debt payments.
For instance, who would you lend money to?
An individual who earns $5000 monthly and spends $2000 on debt payments which equal 40% of their GMI on a mortgage and other debt
An individual who earns $7000 monthly and spends $2000 on debt payments which equals 28.6% of their GMI on a mortgage and other debt
Most lenders will choose the second option as it minimizes risk. It also shows an acceptable balance in paying off your loans.
If you can’t improve your income, lower your debt as it contributes to reducing your DTI. A good number of homebuyers cut down on expenses to lower their monthly bill payments. Above all, try to improve your income and lower your debt to improve your DTI ratio.
7. Consider discount points
Discount points are fees you can pay after closing to lower your mortgage interest rate. Some borrowers tend to pay discount points to reduce their interest rates.
One point equals 1% of your original loan amount, which usually lowers the interest rate by 0.25%. For instance, if you borrow $300,000, one point would cost $3000. Hence your interest rate can go from 4.5% to 4.25%.
While this seems attractive, it can take years for your monthly savings to exceed the initial amount. Moreover, several factors determine your potential profit. Such factors are the loan amount, cost of discount points, and interest rate. Additionally, it usually takes up to a 7-9 year period.
However, if you plan on refinancing your loans in a few years, you don’t have to pay mortgage points. Discounts points make you pay extra money initially to save a few dollars each month.
8. Review closing costs
While seeking a mortgage, the interest rate is essential but don’t forget closing costs. Closing costs are the total fees you get charged by third parties and lenders. They are usually 2-5% of your total home purchase price.
For instance, if your home costs $200,000, you might pay a closing fee of $4000- $10,000. You can see it is quite the amount; therefore, make inquiries about your lender’s closing fee. You can also review your loan estimates document to check upfront costs.
Closing costs usually consist of fees such as appraisal fees, title insurance, and others. Although closing costs don’t impact mortgage rates, paying mortgage points will.
You can search for lower-cost lenders; the loan estimate document will show services to seek.
9. Compare mortgage rates from multiple lenders
One helpful tip is to apply for loans from various lenders. Tens of thousands of mortgage lenders seek your proposal. Hence one of the ways to get the best mortgage rate is by applying to several lenders. This process allows you to compare interest rates and select the lowest. Without a doubt, you won’t find the same interest rate across each mortgage lender.
Lenders offer loan estimate documents. This form reveals interest rates, closing costs, and other details such as total costs in the initial five-year period. This process helps you compare interest and annual percentage rates (APR).
Note that your rate depends on factors such as credit score and location. Also, you can view lenders’ websites to note their typical interest rates.
Moreover, you don’t have to worry about your credit score getting hit when applying for multiple loans. You’re allowed a 45-day window to submit your information for inquiries without hits to your credit.
It is advisable to seek options beyond a loan from your financial institution. Such options are credit unions, online lenders, and even private lenders. The more you shop around for loans, the better mortgage rates you find.
Even if you don’t get a much lower interest rate, a little difference will help. You also could end up saving up to $5000 on getting additional mortgage rates.
Note that a lower interest rate is suitable for a longer loan term. Alternatively, shorter loan terms are suitable for high closing costs.
So, apply for a loan with a minimum of three lenders to get the best mortgage interest rate.
10. Observe mortgage rates
Observing mortgage rates is an excellent method of getting a good loan rate. When borrowing money for your home loan, watch mortgage rates as they waver continuously. Sometimes, the changes might be small, but you can lock your rate at that period.
If you luckily lock your rates at a down-period, you would end up with fewer monthly mortgage payments.
Here are a few tips that will help when observing rates:
- Make preparations to take maximum advantage of a down-period by watching the performance of rates
- Seek advice from mortgage brokers on the best down-period
- Immediately you notice a suitable down-period, contact your lender
- According to Freddie Mac’s Mortgage Market Survey, rates have moved from 2.86% in September 2021 to 5.7% in June 2022. It is advisable to lock your rate at 5.7% if you’re paying 0.9 in fees and points. Note that this report is for 30-year fixed-rate mortgages. However, mortgage rates are high due to inflation and a potential economic recession.
11. Apply the use of a mortgage calculator
A mortgage calculator gives you an estimate of your potential mortgage payment. With this financial tool, you can find a monthly payment plan that suits your needs. Moreover, you can input different data to find costs optimized for you.
When using a mortgage calculator, you will need to input details such as:
- Original home purchasing price.
- Initial cash you paid upfront or simply your down-payment.
- The duration of the loan or the life of the loan.
- The loan’s annual percentage rate (APR) or cost of the loan.
- Property taxes you pay as the owner of the home.
- Your homeowner’s insurance fee for protecting your home against the risk
- Your homeowners’ association fee for property maintenance
You could change variables to see how your monthly mortgage payment pans out. Also, it will include your total mortgage interest and loan cost.
A shorter loan term will mean fewer interest payments over time and a higher payment. However, longer loan periods mean more interest rates. And also more interest payments and higher monthly payments.
You can calculate your mortgage payment with Bankrate’s mortgage calculator.
12. Make inquiries on first-time home buyer grants and programs
One factor you should consider is special programs for home buyers. It is wise to make inquiries on such grants before you apply for a mortgage. These programs work to make home purchases easier for first-time buyers and even repeat buyers.
The government is actively involved in homeownership, as it is seen as a foundation of the U.S. economy. Therefore, the U.S. government provides a number of homeownership grants and programs. Some of these programs come in the form of tax credits, down payment assistance, etc.
Now, homeownership grants don’t require any form of repayment. This occurrence is due to grants being a public good. In simpler terms, homeowners increase prosperity and build generation wealth among families. This, in turn, leads to prosperity among communities.
Here are some homeownership grants for first-time buyers:
- National Homebuyers Fund
- The Homebuyer.com Forgivable mortgage
- Here are some homeownership programs for first-time buyers:
- Down payment Assistance mortgages
- Closing Cost Assistance Programs for Home Buyers
- First-Time Home Buyer Tax Credit
13. Make inquiries on Private Mortgage Insurance (PMI)
What differentiates the cost of closing your mortgage and PMIs is repetitive payments. Closing fees don’t require multiple payments, whereas a PMI will keep asking for more. If your initial payment is not up to 20%, your lender will consider you a high-risk borrower. Hence you’d have to receive a PMI.
Now, a PMI makes your loan less risky. However, you would have to pay for it. It can cost 0.5%-1% of the total yearly loan. Additionally, it can add thousands of dollars to the total loan amount. Therefore, try to gain the required equity to stop your PMI as soon as you can.
14. Don’t be in haste to make big decisions
At this point, you’ve taken all the major steps to get the best mortgage interest rate. Now, the last thing you want to do is make big hasty decisions. This means making decisions that will tilt your borrowing profile.
For instance, switching careers or applying for more credit can affect your borrowing profile. You want to make sure the lender sees you as a less risky borrower. Try to wait on making big moves till your loan approval is final. You can wait till after a successful mortgage underwriting procedure.
Also, you can lock in your loan rate. This decision will finalize your homeownership deal and secure your loan deal.
Each step listed above will guide you in obtaining a suitable mortgage rate. It isn’t advised to go and seek a mortgage blindly without market knowledge.
If you follow the steps explained above, you will set yourself in the best position to get the lowest rate.
Now, you’re all set to become a homeowner. Good luck with your purchase.
What is mortgage refinancing?
Mortgage refinancing is the process of replacing your current mortgage loan with a new one. This process works by paying off your old loan with the new loan. Also, you start to make payments on the new loan.
What documents do lenders ask for?
Lenders usually for proof of assets, proof of income, and tax information. They are stricter with self-employed borrowers and ask for more documents. Such documents are credit information, proof of debts, etc.
What is a locking rate?
A locking rate is an unchanging rate during the offer and closing period. It gives the borrower a chance to lock a mortgage rate during a stipulated period.