When shopping around for a mortgage, most borrowers want to find the most affordable rate in the marketplace. The trouble is, finding rock bottom rates doesn’t always mean working with the most reliable lenders. Therefore, a wise borrower will try to improve their finances in order to qualify for a lower rate with a great lender.
At Luxury Mortgage, we offer competitive rates on a variety of home loans; however, if you really want to ensure you get the lowest rate possible, there are a few things you can do to improve your chances.
Raise your credit score.
Keeping your credit score high can not only help you lock in a lower rate, it can allow you to have more options when it comes to loan programs. Borrowers with less-than-ideal credit scores are typically limited to government-backed loans like FHA or VA mortgages, or they have to pay a higher interest rate on conventional loans.
Don’t misunderstand us – FHA and VA loans are terrific options for some home buyers, especially those who cannot afford a large down payment; however, the interest rates on FHA loans are sometimes slightly higher than those associated with conventional fixed rate mortgages. So if your goal is to get the best rate possible, a conventional loan may be a better option.
Increase your down payment.
The more money you can put down at closing, the less money you’ll have to borrow from your lender. This makes your loan less of a financial risk to the lender, and therefore, could allow you to secure a lower interest rate.
Making a more substantial down payment could also help you save on private mortgage insurance (PMI), which is something a lot of lenders will charge if you can’t pay the traditional 20% down. PMI is not required with some loans – USDA mortgages are one example – however, there are usually special fees involved with loans that do not have PMI requirements. For instance, USDA loans have an upfront guarantee fee of 3.5% of the total mortgage amount and VA loans charge a funding fee, which helps fund the program itself and reduces the cost to taxpayers, rather than insuring the individual loan.
Consider an ARM.
If you don’t plan on owning the home more than 5-7 years, an adjustable rate mortgage (ARM) may be a wise financing option. With an ARM, the borrower pays an introductory set interest rate that is usually much lower than rates associated with conventional fixed rate loans. For example, in a 5 year ARM, the borrower will have a low introductory rate for the first 5 years of the mortgage. After the 5 year period is over, the rate will be subject to adjustment. The rate could adjust up or down, depending on the market. That’s why ARMs tend to become more popular when mortgage rates are trending higher – people want to start out with a lower rate and hopefully sell before their set rate period is over, or refinance to a fixed rate loan when rates start to go down again.
An ARM could be a good option for new home buyers who will have siginifcant equity in their homes when they make their purchase. Having equity is important, as it can help you refinance to a fixed rate mortgage down the road, if needed.
Maintain a steady employment history.
Most lenders want to see loan candidates with at least two years of steady employment, including those who are self-employed. If you’ve got more than the standard two years of steady work and stable income, even better.
Numerous periods of unemployment or significant variations in income from year to year are big red flags to lenders, warning them that you may be a high-risk investment. This could mean you’re stuck paying a high interest rate, or you’re denied a mortgage altogether.
Build your cash reserves.
Having more money in savings accounts, checking accounts or money market funds shows the lender that you are good at bringing in more money than you’re spending. Most lenders want loan candidates to have at least two months’ worth of house payments saved up in their cash reserves. Again, this includes money in your checking or savings accounts, money market funds, or certificates of deposit. It generally does not include money that is in retirement accounts or any sort of account that you can’t withdraw cash from without paying taxes or penalties.
Also, keep in mind that lenders may require more than the standard two months’ worth of cash reserves for higher risk loans like jumbo mortgages or investment property loans.
If you have additional questions about finding a low mortgage rate, don’t hesitate to speak with your lender about your specific situation. And if you’re ready to explore mortgage options and compare rates, contact Luxury Mortgage today for a free rate quote and mortgage consultation.
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