Best Mortgage Rate

After the house sticker price, your interest rate will have the biggest impact on your monthly mortgage payments. With a higher interest rate, interest takes up a larger part of your monthly housing budget and can also affect the price range in which you can buy comfortably.

Although you may feel like you are at the mercy of lenders and the market, there are some steps you can take to improve the interest rates they offer, potentially saving thousands of dollars and increasing your home buying budget.

1. Strengthen Your Financial Profile

The best mortgage rates are usually reserved for borrowers with the best credit scores, so you will want to know where your credit score will be with lenders. Results in the highest range (720-850) are considered “excellent”, while results in the 690-719 range are considered “good”, results in the 630-689 range are considered “fair” and results in the 300-629 range are considered “bad”.”

You can increase your credit score by paying your bills on time, as well as paying off your debts to reduce the amount of loan you use and keep low balances. Keep your cards open to prevent your usage from increasing. You also want to repay all debts incurred in the collections.

NerdWallet recommends that you request free credit reports from the three major credit bureaus (Experian, Equifax and TransUnion) and dispute any errors that could harm your credit score. You can access these reports on AnnualCreditReport.com .

In addition to your credit score, lenders also take into account your debt-to-income ratio (DTI). This is the percentage of your total monthly income used to pay your debts. This number does not include debt-free expenses such as food or utilities.

Lenders usually want this number to be no more than 36%; the lower the better. Paying off credit card debt also improves your debt-to-income ratio. You can find this number using the NerdWallet DTI calculator.

2. Make a larger down payment

Being able to put a larger amount on a house reduces your loan-to-value ratio (LTV) and, in general, your mortgage rate. For example, if you pay a deposit of 20%, your LTV will be 80%.

Conventional mortgage borrowers who deposit less than 20% must also pay private mortgage insurance (PMI), an additional monthly expense. When looking at rates from online lenders, keep in mind that the advertised rate often assumes that the borrower deposits 20% or more.

3. Consider paying points

Discount points are fees that borrowers pay to reduce the interest rate on their mortgages. One point costs 1% of the loan amount, which usually reduces the mortgage rate by 0.25%, although the reduction may vary.

When you pay for discount points, you usually pay thousands of dollars up front to save a few dollars each month. The more points you buy, the greater your monthly savings. You will probably have to pay at least three or four discount points to save more than $100 every month. It takes several years for your total savings to exceed the amount originally paid. This break-even point varies depending on the loan amount, the cost of points and the interest rate.

The NerdWallet Mortgage Points calculator allows you to calculate the potential savings through payment points and determine the break-even point. If the break-even point exceeds the time that you plan to spend at home, it is probably not worth buying points.

For example, if you pay $3,000 for a discount point on a $300,000 mortgage, you could reduce your mortgage rate from 6.75% to 6.5%. This would translate into monthly savings of $50, with a breakeven point of five years to recover the cost of the point.

4. Take advantage of first-time home buyer programs

Before choosing a mortgage, you need to find out if you qualify for special programs that make buying a home affordable. Many states offer assistance to first-time home buyers as well as regular buyers.

Each state offers its own range of programs, often including down payment assistance, combined with favorable interest rates and tax breaks. Some programs are geographically targeted, while others offer assistance to home buyers in specific professions such as teachers, first responders and veterans.

5. Purchases from several lenders

You probably wouldn’t commit to buying the first house you visit, would you? You would look around until you found one that meets your needs and is affordable. The same Philosophy can be applied to the search for a lender. If you have an existing relationship with a lender, they can be a good place to start, especially if you offer discounts to current customers. However, applying for pre-approval from some lenders gives you the opportunity to compare offers and see who offers the lowest interest rate.

6. consider other types of mortgages

Although 30-year fixed-rate mortgages are popular with homebuyers, other types of mortgages may come with lower interest rates.

For example, adjustable-rate mortgages (ARMS) may have introductory rates lower than the market. These mortgages have a fixed interest rate for a number of years before changing regularly, usually every six months. For example, an ARM 5/6 will have a fixed interest rate for five years before being adjusted every six months. This can be risky because you will have to pay more if interest rates rise. However, these mortgages can be a strategic choice if you plan to sell before the set deadline.

You can also choose a shorter loan term; 15-year mortgages often have lower interest rates than 30-year mortgages. Because you have less time to pay it, your monthly payments will be higher. However, you will save on the total loan because you will make fewer interest payments.

Loans backed by the Federal Housing Administration (FHA) may also have lower interest rates than traditional mortgages, as well as more flexible qualification requirements.

However, you will have to pay a monthly insurance premium. If you can pay a deposit of 10% or more, you can cancel this insurance benefit after 11 years. Otherwise, you will have to continue paying it for the duration of the loan or until refinancing.

You can also consider a shared appreciation mortgage (SAM), in which a lender is granted a percentage of the future appreciation of the home in exchange for a below-market interest rate or some other type of benefit. In addition to the monthly loan payments, at the end of the term, you will pay the remaining principal plus a percentage of the estimated value. Note that if your house increases in value, you are forced to pay more to the lender. Under the conditions of a traditional mortgage, you would keep the accumulated equity.