How to Get the Best Mortgage Rate

Borrowers who are getting ready to buy a home often wonder how to get the best mortgage rate. With some planning and by taking the right steps, they can feel confident that the rate they get is the best one for them.

By Catherine Hiles | Published Sep 23, 2022 2:01 PM

How to Get the Best Mortgage Rate

Photo: istockphoto.com

A home is one of the most significant purchases many people will make in their lifetime, and many will need to take out a mortgage in order to afford to buy a home. What is a mortgage? A mortgage is a type of loan that provides future homeowners with the money they need to buy a home. They will then pay that money off in monthly installments until the loan reaches the end of its term. Since mortgages are long-term loans, it pays to plan ahead in order to find and qualify for the right loan. But borrowers often wonder how to get the best mortgage interest rate when there are so many factors to consider. By following these steps, borrowers can ensure they have done their due diligence in getting the best mortgage rate for them, which means they can move forward with their home purchase knowing that the rate they have is the best one for them.

Before You Begin…

How do you get the best mortgage rate? Before starting the mortgage application process, borrowers will want to familiarize themselves with their credit reports. There are three major credit bureaus that lenders may use to determine a borrower’s creditworthiness: TransUnion, Experian, and Equifax. Borrowers can retrieve copies of their credit reports from each bureau online by creating a free account. Depending on the amount of detail the borrower wants to see from their credit report, they may need to pay a small fee, but basic information is generally available for free. Alternatively, consumers can get free credit reports from all three credit bureaus as frequently as once per week from AnnualCreditReport.com, which is authorized by federal law.

When checking their credit reports, borrowers will want to look for inaccuracies that may be damaging to their credit score. If they do notice inaccuracies, they can open a dispute to potentially get the information removed from their credit, which can help boost their overall credit score.

STEP 1: Improve your credit score by creating strong financial habits.

Borrowers who are asking themselves, “How can I get the best mortgage rate?” can start by working to improve their credit score once they feel confident that their credit report is accurate. A credit score tells lenders how trustworthy the borrower is when it comes to repaying their debt. One of the best ways for homeowners to boost their credit score and show that they are financially reliable is to ensure bills are paid on time. Borrowers can also work on paying down debt before applying for a mortgage; they’ll want to try to get their credit balances down to no more than 20 to 30 percent of their available credit limit. This shows the lender that the borrower is responsible with their available credit, which makes them more likely to pay their monthly mortgage bill on time. That, in turn, can lead to the borrower qualifying for a lower mortgage rate.

STEP 2: Pay down debt to decrease your total debt-to-income ratio.

The amount of debt a person carries can have an effect on whether or not they will qualify for a mortgage—and if they do, what type of interest rate they will pay. A debt-to-income ratio is simply how much debt someone has in relation to how much money they make. A borrower who has a lot of debt will appear to be more risky to a lender than one who does not.

When considering a mortgage application, lenders will factor in the borrower’s monthly housing cost, including mortgage payment, property taxes, and homeowners insurance. These costs are referred to as the “front-end ratio.” In addition to the borrower’s mortgage, the lender will also take into account debt such as student loans, car loans, and credit cards, also called the “back-end ratio.” In general, lenders look for a front-end ratio no higher than 28 percent of a borrower’s gross monthly income and a back-end ratio of 36 percent or lower. Some types of loans, such as those guaranteed by the Federal Housing Administration (FHA) will allow a higher back-end ratio but may come with a higher interest rate in exchange. By decreasing their non-housing debt, borrowers will be more likely to get the best rate on their mortgage loan.

How to Get the Best Mortgage Rate

Photo: istockphoto.com

STEP 3: Brainstorm ways to potentially increase your income.

One way for homeowners to get a better mortgage rate is to increase their overall monthly income. Of course, this may be easier said than done depending on the borrower’s personal situation. But for workers with steady jobs, asking for a raise when they are getting ready to buy a home can help them secure a better interest rate.

If asking for a raise isn’t an option, borrowers may consider looking for a new job with a higher salary. However, it’s not the best idea to make a major change like a job switch too close to applying for a mortgage, so buyers will want to start this process sooner if they plan on switching jobs. Alternatively, those wondering “How can I get the lowest mortgage rate?” can look into ways to make additional income, such as taking on a side job, freelancing, or monetizing a hobby, which can in turn translate to a lower rate.

STEP 4: Look into government incentives and loans for potentially lower rates.

If increasing income isn’t an option for a borrower and they are still wondering how to get a good mortgage rate with the money they have, they can look into government incentives and offers. Some states offer incentives to first-time home buyers to make it easier for them to get on the property ladder, while others offer incentives to repeat buyers as well. These incentives can help the buyer save for a down payment, get lower interest rates, or get tax rebates for purchasing a home. To determine what, if any, programs are offered where they live, borrowers can contact their state housing finance agency or their state department of Housing and Urban Development (HUD).

The U.S. government also guarantees several loan types to help Americans become homeowners. Some examples are the Federal Housing Administration (FHA) loan, the Department of Veterans Affairs (VA) loan, and the United States Department of Agriculture (USDA) loan. These loan types can help those who may be otherwise unable to afford a home.

STEP 5: Save as much as possible for a down payment on the home.

A home is one of the most expensive purchases many people will make in their lifetime. Home buyers who can put down a chunk of money when buying a home will be able to take on less debt than those who don’t have a down payment. Buyers who put down less than 20 percent of the purchase price on a conventional mortgage will generally be required to pay private mortgage insurance, or PMI, until they reach that 20 percent equity mark. This is because lenders see buyers with a larger down payment as less risky than those with a small (or no) down payment.

What is mortgage insurance? PMI helps lessen the risk for lenders, which allows borrowers with lower down payments to qualify for a mortgage. While a down payment of 20 percent or more won’t necessarily lower the mortgage rate for the borrower, it will eliminate the need for PMI and therefore reduce the borrower’s overall monthly mortgage payment.

STEP 6: Consider a 15-year mortgage term over a 30-year term.

Borrowers wondering how to get a mortgage will also need to consider their desired loan length. The length of the mortgage, also known as the loan term, can have an effect on the mortgage rate as well as the total amount of interest paid over the life of the loan. In general, the interest rate on a 15-year mortgage will be lower than on a 30-year mortgage. That’s because lenders see shorter loans as less risky than longer ones; it’s hard to predict whether the borrower will still be in a position to make mortgage payments after 2 or 3 decades.

On top of that, the borrower will end up paying less interest over the term of a 15-year mortgage than a 30-year one. Depending on the loan amount, the savings could be in the tens of thousands of dollars range. Buyers will need to remember that a shorter loan term means a higher monthly payment, though, which could limit the amount they are able to spend on a home purchase.

How to Get the Best Mortgage Rate

Photo: istockphoto.com

STEP 7: Determine whether to apply for a fixed-rate or adjustable-rate mortgage.

One of the biggest decisions borrowers will need to make when getting a home loan is whether to choose a fixed-rate or an adjustable-rate mortgage. Both have their advantages and disadvantages, and the answer to the question, “How do I get the best mortgage rate?” will be different for each borrower.

With a fixed-rate mortgage, the borrower will pay the same interest rate for the life of the loan. This can be a good option when interest rates are low, but choosing a fixed-rate mortgage when interest rates are high can translate to thousands more dollars paid in interest by the time the loan is paid off. Buyers who go with a fixed-rate mortgage will have predictable monthly payments, but if interest rates decrease they’ll need to refinance their loan in order to take advantage of those lower rates.

An adjustable-rate mortgage, on the other hand, starts with a lower rate for a fixed period of time, typically between 5 and 10 years. Once that period is up, the interest rate will adjust periodically based on the market. That means the homeowner may see their monthly mortgage payments increase if the interest rate goes up. However, buyers who don’t plan on staying in their home for the full 15 or 30 years of the loan may be able to take advantage of a lower interest rate for the initial period with an adjustable-rate mortgage.

STEP 8: Use a mortgage calculator to estimate your monthly payments.

When buyers are coming up with a budget for a home purchase, a mortgage calculator can be a helpful tool to utilize. To use a mortgage calculator to estimate monthly payments, borrowers will need to have the following information on hand:

  • The purchase price of the home
  • The down payment amount
  • The loan term (i.e., the length of the loan)
  • The potential mortgage interest rate
  • The amount of property taxes owed annually on the property
  • The estimated cost of homeowners insurance
  • Any additional fees, such as homeowners association (HOA) fees or PMI

Once the buyer enters this information into the mortgage calculator, they’ll be able to see their estimated monthly payment. They can then play around with the numbers to see if they can afford a higher mortgage, lower down payment, or shorter loan term based on their current financial situation. This information will help them decide how much mortgage they can afford to take on, which will enable them to look for a home that will fit into their budget without overwhelming their finances.

STEP 9: Shop around at several lenders to compare rates.

Many borrowers wonder how to choose a mortgage lender and how they will know which is the best one for them. When it comes to getting a mortgage, it can pay to shop around at several of the best mortgage lenders. Different lenders will offer different rates, so homeowners will want to get quotes from at least three to five lenders in order to find the best mortgage rate. Borrowers can also consider getting quotes from various types of lenders, including banks, credit unions, and online lenders.

When comparison shopping for a mortgage loan, borrowers will want to request all quotes within the same time frame to make sure the rates are comparable. Doing so will generally not be detrimental to the borrower’s credit if they request all quotes at the same time. The three major credit bureaus give a time frame of between 14 and 45 days for borrowers to get as many quotes as they want without affecting their credit score.

Each quote will give borrowers an estimated interest rate and closing costs. Using that information, they can determine which loan is the best one for them. Borrowers who plan to stay in the home long term may choose a loan with a lower interest rate since that is more likely to save them money in the long run. But those who expect to sell the home and pay off the mortgage within a few years will want to look for a loan with lower closing costs, since they’ll have less time to recoup those costs than a borrower who will stay in the home for a decade or more.

STEP 10: Ask lenders whether they will allow you to pay discount points in exchange for a lower rate.

Some lenders will allow borrowers to pay “mortgage points.” These are discount points that the borrower can buy from the lender in order to decrease their mortgage interest rate. One mortgage point costs 1 percent of the loan amount and can decrease the interest rate by 0.25 percent. Borrowers who have the means to pay these discount points may choose to do so in order to lower their monthly mortgage payments.

However, discount points may not always be a good idea. Borrowers will want to calculate how long it will take them to break even if they pay mortgage points in exchange for a lower interest rate. This could be as much as 7 to 9 years. If the borrower doesn’t expect to stay in the house for that long, it may not be in their best interest to pay discount points.

STEP 11: Keep track of mortgage rates to try to lock in the lowest one for you.

Mortgage rates are constantly fluctuating, so it can pay for borrowers to watch mortgage rate trends closely as they are preparing to apply for a mortgage. This may help them get the lowest mortgage rate and lock it in with the lender if possible. Locking in a rate guarantees it for a certain time period. As long as the borrower can close on the loan before the rate lock expires, that rate should be guaranteed. However, the lender could change it if there are any major changes to the borrower’s status, such as a reduced down payment from what was originally agreed upon or a major change in the borrower’s credit score.

STEP 12: Avoid making any large purchases or major life changes before closing on the mortgage.

Applying for a car loan or making a major career change is not the best idea for those who are in the process of buying a home. Lenders want to see consistency and trustworthiness in borrowers, and sudden and major changes such as these can raise red flags. A borrower with a stable job and manageable debt is an attractive candidate for a mortgage, but if that borrower makes a series of changes between applying for a mortgage and closing on the loan, the lender may decide to back out. If possible, it’s best for homeowners to hold off on making major changes such as these until after they have closed on their home loan.

Future homeowners considering how to get the best mortgage rate can simply follow these 12 steps to set themselves up for success when it comes to finding and locking in the best mortgage rate for their budget.