When buying a home, the mortgage rate is one of the most important factors to consider since it has a huge impact on the cost of your loan. If you’re looking to get a better rate, you’ll need to first understand what factors determine your mortgage rate.
- Your credit score: Your chances of getting a mortgage at a low rate is a lot better if you have a high credit score. So, before you apply for a mortgage, you’ll need to check your credit score.
- Price of your home: Conforming loans, which offer loan amounts of $424,000 or less, have a lower rate in comparison to super conforming loans and jumbo mortgages.
- Property location: If you live in an expensive area, you’ll need to get a super conforming loan, and as noted above, this loan may have a higher rate.
- Down payment: The more the risk that the lender has to take by giving you the loan, the higher your interest rate will be. So, when you make a large down payment, the risk taken by the lender lowers, and they will be more likely to offer a low rate.
- Loan term: A short-term loan (15-year mortgage) will likely have a lower rate in comparison to long-term mortgages.
- Fixed-rate vs. adjustable-rate mortgage: Adjustable-rate mortgages usually have a lower rate (compared to fixed-rate mortgages) at the start of the loan term. However, with time, the rate of interest goes up. In comparison, fixed-rate mortgages have a steady rate throughout the loan term.
- Type of mortgage: There are different types of mortgage loans like VA loans, USDA loans, FHA loans, etc. Some of these types of loans also have lower market rates than what’s offered by commercial banks. However, these loans have specific eligibility criteria.
So, essentially, you’ll need to do the following things to get the best mortgage rate:
- Have a credit score of over 800.
- Get a loan under $424,000.
- Buy a home in an affordable area.
- Make a down payment of at least 20%.
- Opt for a short-term loan.
- Choose a variable-rate loan and then refinance to a fixed-rate loan once your interest starts to increase.
- Check if you qualify for a specialized loan program.
Even if you aren’t able to check all these boxes since not all factors will be under your control, you should try to do what you can to make yourself seem like a more attractive borrower.
