Buying a new house is a good experience that can only turn sour if you get a terrible deal on the mortgage.
If you want to get better mortgage rates, here are four things you can try –
4 Tips to Get Better Mortgage Rate
1. Make a bigger down payment
There was a time when a 20% down payment was the norm. But now, there is no binding rule for the one-fifth down payment structure. So, people are taking the liberty and putting 8-12% as down payments, which is even lower for first-time buyers. But did you know that making a larger down payment can lower your mortgage rate?
Yes, it’s true.
The bigger your down payment is, the smaller the Loan-to-Value ratio or LTV is for you. And lower LTV ratio means low risk for lenders.
Since lenders see it as a low-risk investment, more often than not, they tend to lower the mortgage rate. So, if you have the funds, try to make a higher down payment. In the long run, a lower mortgage rate is better than a smaller down payment now.
2. Improve Credit Score
A good credit score is always appreciated, particularly in this case.
When you have a better credit score, like making a bigger down payment, the lender thinks this is a safe investment. As a result, you will get approved for a lower mortgage rate.
There are many online tools that let you calculate or see your credit score. So before applying for a mortgage, see if you can clean up your credit score. Ideally, a credit score over 700 is good enough to get a better mortgage deal.
3. Lower your Debt-to-Income ratio
Debt-to-Income is pretty self-explanatory.
The percentile amount of income that you spend each month on debts against your income is the debt-to-income or DTI ratio. For example, if you earn $20,000 each month and pay roughly $5,000 on debts, your DTI is 25%.
Ideally, DTI below 36% is enough to get a better mortgage rate. Some institutions consider halfway to be the bar, but lower DTI is always better.
If you have a higher DTI, there are some things you can do to lower the ratio.
Holding off a big purchase for a while, increasing income, paying down debts are the standard practices. As you can imagine, these practices will increase the gap between your income and the debt you pay each month, lowering your Debt-to-Income ratio.
So, the general rule of thumb – higher credit score and lower DTI ratio equals a better mortgage rate.
4. Get guaranteed rate lock
Locking down the rate is another best practice when you are trying to lower your mortgage rate.
If you are buying a new house or just moving to another, it is advised to lock the mortgage rate. As the mortgage rates are impacted by the Federal Reserve indirectly, it is wise to lock a low rate since even a slight increase can affect you.
