You may have been hearing that it’s a good time to buy that home you’ve dreamed about or refinance that high interest rate mortgage into a lower interest rate. But then when you apply, you get offered a rate higher than what you thought was the current rate. Why?
That’s an excellent question to ask your mortgage lender, because your interest rate is determined by several factors, including credit history, credit score, down payment, loan-to-value ratios, property type, occupancy (live in it, rent it, etc.), and loan program.
As you can probably guess, a mortgage rate is not a one-size-fits-all situation.
However, there are things you can do to improve your chances of getting the best rate you can.
You’re eligible for a free credit report each year from the Federal Trade Commission, and you should take advantage of this to review your credit report for inaccuracies and areas that need improving. You can check your credit three times per year for free by selecting one of the major credit bureaus per quarter instead of all three at the same time.
You no longer need to have a perfect score to get a mortgage; however, a high credit score helps you greatly with getting a better interest rate.
There are different factors that affect your credit score. To improve your score, it’s important to know what affects your score in the first place. You can also talk to your lender about their credit requirements for rates, as each lender may have different guidelines to help you set a goal for yourself.
Once you know your target score, work on paying down credit card balances, using less credit, consolidating debts, paying more than the minimum, paying on time, and diversifying the types of debts you have, meaning don’t have only credit card debt. The types of debt you have impact your overall credit score, too.
Down payment and loan-to-value (LTV) are often connected in mortgage rate discussions. A down payment reduces the amount of your loan. The relationship between how much you borrow and how much the property is worth is called loan-to-value (equity).
The lower your loan-to-value percentage, the less “risk” you are to a lender (meaning that if you stop making payments for whatever reason, your home’s value should be enough to pay back the mortgage when the home is sold). You may be able to secure a lower interest rate based on your low-risk profile. Another perk of a high down payment is possibly eliminating the need for mortgage insurance.
Discount points allow you to “buy” a lower interest rate and usually cost you a percentage of the loan at closing. This is extra money you’ll need to bring to closing in addition to the down payment and other closing costs.
When deciding if you should pay points or not, you need to consider the long-term goal of the mortgage.
If you are going to be keeping your mortgage for a while, it may be worthwhile to pay for a lower interest rate. If you are going to sell or refinance in a few years, it may not be worth the additional upfront cost because you won’t be in the house long enough to see the overall benefit of the rate reduction.
Your loan officer can help you identify areas of improvement and if there is anything you can do to improve the rate you are qualified for.