Insider secrets to the best mortgage rate

Diana Bocco
Yahoo! Homes

Low mortgage rates: They're a hot commodity that everyone is after. And if you're a part of the crowd who's looking to score a low mortgage rate, there are some things you could do to help make it happen.

To start, you want to make sure you do your homework and have a ballpark idea of what kind of rate you can and cannot get based on your current financial situation.

In fact, "an educated consumer is the best consumer," according to David Zugheri, executive vice president and co-founder of Envoy Mortgage in Houston, TX.

Once you've done your homework, then you can figure out how to land a great mortgage rate. To help, we've highlighted some insider secrets on how to get a low rate. Keep reading to learn more…

Shop Around

To score a low mortgage rate, you might have to do some legwork.

To start, George Adair, an area sales manager for Bay Equity Homes Loans in Santa Rosa, CA, recommends soliciting rates and terms from several prospective lenders - all at the same time.

"Rates are volatile and if a consumer shops around at different times, they are likely not getting comparable rate information," says Adair.

What's one thing a borrower should pay attention to when comparing loans? The annual percentage rate (APR), which "is designed to help consumers compare the true cost of borrowing by including the closing costs in its rate calculation," adds Adair. And because closing costs are not regulated, lenders can basically charge whatever they want, so keeping an eye on APR is something you'll want to remember when shopping around.

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Zugheri suggests comparing rates with at least two to three mortgage companies before committing to one, because the biggest swing in fees are determined from the mortgage company itself.

Find Out/Improve Your Credit Score

The better your credit score, the better the mortgage rate you'll be able to get. On the other hand, the lower your score, the higher the interest rate.

Why does your credit score play such a big part in your mortgage rate? Because FICO scores, the standard credit scores in the U.S, reflect your credit and payment history, as well as your level of debt.  Thus, your score, which could range from 300 to 850, is used by lenders to determine how much of a financial risk you.

So what is the magic number when it comes to your credit score?

"Most lenders and brokers will qualify a borrower for a mortgage loan if they have a FICO score of 620 or higher," says Adair.

But what if your credit score is less than 620? There are things you can do before you apply for a mortgage to help improve your score and obtain the best rate possible.

Adair points out that one of the easiest ways to improve a credit score is to reduce the average balance of your credit card accounts to less than 30 percent of the credit limit. "Consumers will see significant score improvements from just paying down their credit card debt," explains Adair.

Choose a Shorter-Term Mortgage

If you can save a few extra bucks a month to put toward your mortgage payment, the rewards in the end can be substantial.

Why? Because the shorter the repayment period, the lower the interest rate. This means you'll end up paying less money over the term of the loan. The downside? Although the rate is lower, the monthly payment is higher because of the shorter term.

For example, a 30-year term, $200,000 loan at 3.625 percent will have a monthly payment of $912, according to Joe Parsons, senior loan officer of PFS Funding, a mortgage brokerage located in Dublin, CA.

"The same loan with a 15-year term will have a rate of 3.125 percent and a payment of $1393," he adds. And while your payments will be higher with a shorter-term loan, you could save around $75,000 in total interest by the time you're done paying for your mortgage.

As you can see, a shorter-term mortgage is a great way to score a lower mortgage rate, as well as save money over the life of your loan.

Have a Steady Job

A steady job will not guarantee you a lower rate, but it might help you get the loan approval you're looking for.

In fact, "the easiest borrowers to approve have been in the same line of work, with the same employer, for at least two years," says Adair.

Specifically, lenders are impressed when borrowers have consistent W-2 wages that are easily documented on their pay stubs and verified in writing by their employer.

On the other hand, self-employed borrowers may have a more difficult time demonstrating consistent and current employment. Thus, they might need to show a combination of business tax returns and business licenses to help verify earnings and prove to a lender that they have a means of paying the mortgage every month.

Make a Large Down Payment (if possible)

If you can only meet one of the requirements on this list, this might be the one to aim for. Why? Because your best chances for a low mortgage rate depend on how much money you can put down.

"Most programs require a borrower to put down 20 percent," says Adair. The less you put down, the higher the risk a homeowner is to a mortgage lender, he adds. This is because the more money a borrower invests into the house in the form of a down payment, the less likely they are to default because they'll be losing more money.

"For example, in the Great Recession, homeowners that put down little to nothing were the first to let their house go into default and eventually foreclosure."

The good news for prospective home buyers is that there are loan programs available for those who may not be able to afford a 20 percent down payment. For example, the Federal Housing Administration, or FHA, provides homebuyers with mortgage insurance. This basically helps protect the lender, thus they are more likely to approve a loan application with a smaller down payment.