The 3 Most Important Things You Can Control to Get the Best Interest Rate on a Home Loan
Introduction
When it comes to securing a great mortgage interest rate, there are a few key factors you can control. While market conditions play a role, focusing on what you can manage makes a big difference. Here, we’ll cover the top three factors that can help you get the best possible interest rate on your home loan: your credit score, down payment (loan-to-value ratio), and loan term.
Whether you're a first-time homebuyer or refinancing an existing mortgage, understanding these factors can help you lock in a more affordable rate and potentially save thousands over the life of your loan.
1. Your Credit Score:
Your credit score is one of the most important factors lenders look at when determining your mortgage interest rate. A higher credit score indicates to lenders that you're less of a risk, which translates to better loan offers.
Why it matters: Borrowers with excellent credit scores (usually 740 or above) are likely to qualify for the lowest mortgage rates. On the other hand, borrowers with lower credit scores may face higher rates, increasing the overall cost of their loan.
How to improve it:
Pay bills on time: Late payments can have a big impact on your score. Setting up payment reminders or automatic payments can help avoid missed due dates.
Keep your debt low: Your credit utilization (the amount of debt compared to your credit limit) plays a big role in your score. Aim to use less than 30% of your available credit.
Check for errors: Regularly check your credit report for errors that could be bringing your score down. You can request a free report annually from each of the major credit bureaus.
2. Your Down Payment (Loan-to-Value Ratio):
The size of your down payment affects your loan-to-value (LTV) ratio, which is another critical factor in determining your interest rate. The more money you can put down upfront, the lower your LTV and the better your interest rate is likely to be.
Why it matters: Lenders view a lower LTV ratio as less risky, which leads to better loan terms and potentially avoiding private mortgage insurance (PMI), which is typically required for down payments below 20%.
How to improve it:
Save for a larger down payment: While some loans allow you to put down as little as 3-5%, aiming for 20% can secure you a better rate and eliminate the need for PMI.
Consider other sources of funds: If saving for a large down payment is challenging, consider using gift funds from family members or looking into down payment assistance programs.
3. Your Loan Term:
The term of your loan—whether it's 15, 20, or 30 years—has a direct impact on your interest rate. Shorter loan terms generally come with lower interest rates, but they also come with higher monthly payments.
Why it matters: A shorter loan term reduces the total amount of interest you’ll pay over time. For example, a 15-year mortgage often comes with a lower rate than a 30-year mortgage, allowing you to save thousands of dollars in interest, even if the monthly payments are higher.
How to decide:
Consider your budget: While a 15-year loan offers lower rates, the higher monthly payments may not fit into your current budget. A 30-year loan offers lower monthly payments but results in more interest paid over the life of the loan.
Long-term savings vs. short-term affordability: If your goal is to pay off your home faster and save on interest, a shorter term is best. If keeping monthly payments low is more important, a longer term may suit your needs better.
Other Factors Lenders Consider:
While credit score, down payment, and loan term are the main factors you can control, lenders may also look at other elements when determining your interest rate.
Debt-to-Income (DTI) Ratio: This measures how much of your monthly income goes toward debt. A lower DTI ratio is viewed favorably by lenders. Try to keep your DTI below 41% to qualify for the best rates.
Type of Loan: Different loan types (FHA, VA, Conventional) come with different rates and terms. For example, government-backed loans like FHA and VA loans often have more flexible requirements and can offer lower rates for certain borrowers.
Market Conditions: Though out of your control, it's good to keep an eye on current mortgage rate trends and economic conditions that influence the overall market.
In Conclusion
By focusing on your credit score, down payment, and loan term, you can take control of the factors that most influence your mortgage interest rate.
While market conditions may fluctuate, making smart financial decisions in these areas can significantly lower your costs over the life of your loan. Whether you're buying your first home or refinancing, working on these key factors will help you secure the best possible mortgage rate.
Ready to explore your mortgage options? Contact us today to learn how you can secure the best interest rate based on your financial situation. We’re here to help!
Contact Nick Meeker at Rochester Home Loan today at 507-696-1649 or email nmeeker@nexamortgage.com to see how refinancing can benefit you.
