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To get a lower mortgage interest rate, start by lowering your debt-to-income ratio.
- Getting approved for a mortgage can be complex, but if you do things right, you may be able to get a lower mortgage interest rate.
- Your credit score and credit report are vital for mortgage approval. Work on improving your credit score to get the best rate.
- Your income and income compared to your debt obligations are other important parts of getting a mortgage, so don't ignore that key part of the approval process.
- Shopping around and working with your lender can save you even more compared to published interest rates.
- Read more personal finance coverage.
If you are looking to buy a home, you are likely preparing for the biggest purchase of your life. To finance a home purchase, many households look to a mortgage loan from a trusted lender. Mortgages make sense for millions of people.
To get the best deal, you can follow these steps to get a lower mortgage interest rate.
How to get a lower mortgage interest rate
1. Improve your credit
There are two main places a lender looks when approving a mortgage. The first stop is usually your credit report. If you are applying for the loan jointly with a spouse or other partner, it's a team effort, so you should work with them on their credit, too.
The two biggest factors in your credit score are your payment history and account balances. Make sure to always pay on time and work to pay off any credit card and line-of-credit balances before applying for a new mortgage. It's a good idea to take at least a six-month moratorium from applying for new accounts as well.
2. Optimize your debt-to-income ratio
As part of the loan approval process, also known as underwriting, the bank will look at all of your current debt payments. They will use your credit report to gather your minimum payments on every credit card, student loan, car loan, and other debt under your name on your credit report.
To decide if you can afford the mortgage, the bank will compare your monthly income to your monthly debt obligations. This is known as your debt-to-income ratio (DTI). If you have any way to increase your income and pay down outstanding debts, you'll have the best possible DTI when applying for your mortgage.
3. Shop around for the best deals
In addition to qualifying for the best rate on your own, you should pick a lender with the lowest interest rates. Just because you have your checking account at a bank down the road doesn't mean they offer the best rates. The internet makes it easy to quickly compare the best rates.
When I bought my home in Portland, Oregon, I talked to two local lenders and one nationwide credit union. I found the best rate given my income and credit came from PenFed Credit Union, so that's where I got my mortgage.
For my current home, I shopped around again and found that a California-based lender, New American Funding, had the lowest rate for my finances.
You have to shop around to get the answer for your unique situation.
4. Consider points and promotions
Some lenders offer discounts when you qualify or promotions for lower rates. Also, look at federal or state programs and loan programs from the VA, FHA, and other government loans if you are eligible. If you're not sure, talk to a prospective lender or mortgage expert to learn more.
Points are a way to lower your interest rate by making a cash payment upfront. Points can save you money in some cases, but the math doesn't always add up. Try out a mortgage calculator that supports points to decide if it's a good deal for you.
Small savings on a big loan add up fast
For a savings account with a $1,000 balance, the difference of a 0.25% interest rate isn't that big of a deal. But for a mortgage with a six-figure balance and 30-year payback period, a quarter of a percent is huge.
When it comes to the biggest purchase of your life, even a small interest rate savings can be worth tens of thousands of dollars. Using these steps, you can find the lowest possible interest rate for your finances.
How much house can you afford? Use this calculator to find out:
More coverage from How to Do Everything: Money
How to prepare your credit for a mortgage
How to find the best mortgage rate
What is private mortgage insurance?
How to calculate your mortgage payment
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