Every borrower, every mortgage, and every approval are different, but there are some universal factors that result in the best possible interest rates. Here is the formula for getting a great low-rate mortgage no matter who you are:
# Credit Score
Your credit score may not be all you need to get the best interest rate on your mortgage, but none is more important. According to research conducted by Zillow, consumers with a FICO score above 740 (out of a possible 850) received the best interest rates on their mortgages. But myFICO.com takes it even a step further, stating that the best mortgage rates are available to those with a score above 760.
Since about 40% of Americans have scores at 740 or better, it’s certainly not out of reach. But with 30% of Americans still with scores below 620, credit score is something you can’t take for granted when applying for a purchase loan or a refinance.
– Debt
The level of debt a consumer holds compared to their income is an important measure of financial stability for banks and lenders. Too much debt and they see a consumer is at risk of defaulting on the new mortgage. Traditionally, a debt-to-income ration, or DTI, should be no greater than 36% if you include all of a consumer’s debt AND the proposed new mortgage payment. But the lower your DTI goes, the safer you’ll appear to the banks, and therefore your rate could be decreased accordingly.
+ Cash Reserves
Another benchmark of security for banks and lenders is the amount of savings – 0r cash reserves – a consumer keeps. The standard requirement is that they have at least two months worth of your total bills in savings. But if a mortgage applicant has a large amount of reserves, or is sitting on significant liquid assets, the banks will gauge their risk as lower and therefore the interest rate will reflect that.
& Employment
Even if you have a great job that pays well right now, lenders want to see as much long term career stability as possible. Generally, if someone is at one job for two years or more (or moved to a higher paying job but in the same industry), they are considered lendable. Even greater stability may equate to lower rates, and self-employed, commission based, or seasonal work is deemed riskier and requires additional documentation.
% Down Payment (or equity)
Whether you’re applying for a purchase loan or refinancing your current home, banks and lenders require 20% equity or down payment as a general rule. There are loan programs that allow you to put only 10% or 5% down, or even government-backed FHA loans for 3% down, but all of those come with higher rates or a higher cost, such as Private Mortgage Insurance, PMI.
But if you have a significant down payment or equity above and beyond 20%, your interest rate may be able to go even lower.
<> Timing
Mortgage interest rates move up and down every day, and are only guaranteed once a lender locks in a rate once the application has been submitted and vetted. Therefore, locking in the best interest rate at the right time is a bit like throwing a dart at a moving target. But a good mortgage professional can tell you exactly what you need to do and get the timing right, so you’ll lock in the best interest rate possible.
$ Closing costs
There are costs and fees associated with every mortgage, as well as compensation to the bank or lender. It’s important you understand exactly what you’re paying for your mortgage (all of that will be broken down on the Good Faith Estimate and then again on the closing statement you sign). Many times, the closing costs and fees are “built into” the loan, increasing the loan amount slightly so you don’t have to come up with the money out of pocket, but you can also pay at closing or opt for a “no-cost” refinance. All of these options can affect your interest rate so they should be worked out with your lender early in the process.
/ Buying the rate down
It may be possible to get your interest rate even lower by buying it down or paying discount points. These points – a percentage of the loan amount you make up front – essentially pay for an incremental decrease in the interest rate. If you plan on staying in the home (and in the loan!) for the long term, paying points is a great way to access a better rate and save a lot of money on interest.
There are different ways to go about it and it’s important to know the savings, true cost, and break-even point, so talk to us first for more information and what options are available.
@ 15-year loan
While most conventional loans span 360 payments (30-years), many lenders offer 15-year loans. Since you only have 180 payments to pay off the whole amount, the payments will be higher, but the good news is that the rates are typically lower for 15-year mortgages, giving you a huge break on the total cost of interest. There are also adjustable loan products and sometimes interest-only products that are beneficial in the right situation, but consumers should exercise caution and know the pros and cons before opting for any risky loans.
= A lender you trust
Almost every lender advertises low-interest rates, especially on the internet, but too often, there are conditions, qualifying factors, hidden caveats, and even bait and switch tactics that add up to a consumer with a higher rate than was originally promised. Working with an honest, reputable, and experienced lender you can meet face-to-face means you’ll bypass all of that nonsense and end up with a great loan with the best possible interest rate at the right price.
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I’d love to answer all of your questions and compete for your business, so please contact us if you’re thinking about a refinance or home purchase.