If you're in the market to buy a new home, it's a great time to do so since interest rates are at an all-time low.
But a lot of factors go into determining your rate. So, what can you do to ensure that you score a low one? Well, you probably already know that having a good credit rating and a steady job definitely help, but having little debt and researching lenders could also make a big impact on your score.
Want to make sure you get the best deal on your mortgage overall? Here are some tips to help you get a low interest rate…
Tip #1: Negotiate Closing Costs and Interest Rate
When you take out a loan, you'll have to pay fees known as closing costs.
Closing costs can run anywhere from 3 to 6 percent of the loan, and typically include fees such as an application fee, a loan origination fee, and an appraisal fee, just to name a few, according to the Federal Reserve Board (FRB).
Luckily, you can save on those costs by negotiating with the seller to have them pick up some - if not all - of the tab through what's called "seller concessions," says Rod Zacharias, a Boise, Idaho mortgage broker.
What's more, seller concessions are not only limited to covering closing costs. You can also use seller concessions to lower the interest rate on your loan by "buying down" your interest rate. When you "buy down" the interest rate, you pay a certain amount of money up front to reduce the interest rate for the term of the loan.
Zacharias provides this example: If the purchase price on a home is $250,000 and the borrower is able to negotiate a 3 percent seller concession, the amount of the concession would be $7,500. If the closing costs total $4,000, for example, the borrower can use the remaining funds - $3,500 - to "buy down" the interest rate.
How much you can "buy down" your interest rate will vary from lender to lender.
Tip #2: Understand Your Debt-to-Income Ratio
Lenders want to make sure you'll be able to make your monthly payments comfortably so you don't default on your loan. So naturally, they'll look closely at your debt-to-income ratio - which compares your debt with your income. This typically includes long-term debts like car or student loan payments, alimony, or child support, according to the Federal Housing Authority (FHA).
After reviewing your finances, lenders will reward borrowers who have a low ratio with a lower interest rate, according to Zacharias.
What kind of debt-to-income ratio should you strive for? According to the FHA, your monthly mortgage payment and any other long-term debt you may have (car loans, credit cards, etc.) shouldn't total more than 41 percent of your gross income - although that threshold can vary by a few percentage points depending on the lender. So if your potential new mortgage would put you over that threshold, you could be looking at paying higher interest rates to compensate.
Zacharias recommends that you work on lowering your debt-to-income ratio by paying down any revolving debt (like credit cards) to a low balance. Not only will that improve your debt-to-income ratio, it can also improve your credit score.
Tip #3: Get a 15-Year Mortgage
What's another way to score a low rate on your mortgage? Get a short term loan.
In fact, "shorter-term mortgages - for example, a 15-year mortgage instead of a 30-year mortgage - generally have lower interest rates," according to the Federal Reserve's mortgage refinancing guide.
How much of a lower interest rate can you get on a shorter-term mortgage? According to Mortgage News Daily, an organization that provides housing and news analysis, the interest rate for a 30-year fixed-rate mortgage on March 7, 2013 was 3.63 percent. Compare that with the 15-year fixed rate of 2.95 percent, and you can understand why you'll see significant savings.
"Securing a shorter term loan is a great way to get a lower interest rate, and a great way to save money on your mortgage overall," explains Zacharias. However, he does note that though short-term loans have lower interest rates, the monthly payments are also higher, so you'll want to make sure you can handle the payments.
Tip #4: Don't Put all of Your Eggs in One Basket with One Lender
The mortgage industry is a competitive market, so use it to your advantage. The more you make it known to lenders that you could go elsewhere for your loan, the more they'll be willing to negotiate your interest rate.
In fact, the Federal Reserve recommends comparing mortgage terms from several lenders to make sure you get the best deal.
"Shop around and compare all the terms that different lenders offer - both interest rates and costs. Remember, shopping, comparing, and negotiating can save you thousands of dollars," notes the Federal Reserve in its refinancing guide.
But be prepared. Bring updated copies of your credit report and make sure you keep very good notes about what you've learned from each lender (you can get a checklist from the Federal Reserve's website, www.federalreserve.gov).
And the process isn't over once you decide on a lender. You'll also need to lock in the deal and have your lender put their money where their mouth is. When you choose a lender, the Federal Reserve advises that you ask about a rate lock-in for the interest rate offered to you. A rate lock-in is a written agreement between you and your lender that your rate will remain the same for a specific amount of time, according to Freddie Mac.
This way, you'll hold the lender accountable and won't be in for any surprises in rate hikes when it comes time to closing.
- interest rates