Whether you want to take out your first home loan or refinance your mortgage, you probably have your efforts on one thing: a low interest rate.
And it makes sense to devote your energy into securing a low rate, seeing as interest rates are at record lows, with Freddie Mac marking the January 2013 average for a 30-year fixed rate at 3.41 percent. In January 2010, the average rate for the same loan was 5.03 percent.
So what can you do to ensure you get the best rate possible? Aside from the obvious tips like shopping lenders and keeping your credit score up, our mortgage experts offered the following advice…
Tip #1: Meet with a Lender Several Months Before You Submit Your Application
"Time is the big enemy in the mortgage process," says Amy Tierce, regional vice president at Fairway Independent Mortgage. That's why she suggests meeting with a lender several months before you actually submit your loan application. This way, you can fix any issues that may drive your mortgage rate up.
Tierce stresses this point because once an offer is accepted, you'll typically be on the fast track toward your closing date. At that point, there usually isn't time to correct factors that could potentially lower your rate.
In one situation, Tierce recalls that a homebuyer had a store credit card with a $30 charge that was past due. But because the homebuyer came in early to consult with a lender, the issue was spotted, the homebuyer resolved the payment, and the lender was able to pull a new credit report 60 days after the late payment cleared. In that period of time, the borrower's
credit score had increased by enough to change the mortgage rate by a quarter of a point.
The moral of the story? If a home purchase or refinance is in your future, meet with a lender several months in advance to discuss your financial readiness. This step is a simple way to give yourself time to handle any credit issues and potentially decrease your interest rate.
Tip #2: Provide a Large Down Payment
If you've got a huge chunk of change saved up for your home purchase, then you're on track to receive a low mortgage rate.
Why? Because coming to the table with a large down payment will decrease your loan-to-value (LTV) ratio, a percentage that the U.S. Department of Housing and Urban Development (HUD) defines as the amount of money you're borrowing divided by the value or price of the home you're purchasing.
"As the loan-to-value gets lower (or the down payment gets higher), interest rates get more favorable for the consumer," Tierce explains.
This is also true if you're eyeing a condo purchase, which "are deemed a riskier property type for lenders," says Tierce
In fact, Tierce says that all other factors being equal, a homebuyer who comes to the table with a 20 percent down payment for a house will receive a more favorable mortgage rate than a homebuyer who is paying a 20 percent down payment for a condo. In order to get the equivalent rate, a condo buyer would need to come to the table with a 25 percent down payment, she adds.
Be it a house, condo, or overwater bungalow, if you can afford to make a large down payment up front, you'll often be able to decrease your interest rate and save money over the long term.
Tip #3: If You Can Afford Higher Monthly Payments, Get a Shorter-Term Loan
If you have the luxury of being able to pay more toward your mortgage each month, you might want to opt for a shorter-term loan.
And if you're on the fence about this option, this tidbit from Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington, may change your mind.
Donnelly says that when you plan to repay your mortgage over a 20-year term instead of a 30-year term, most lenders will quote a lower rate. If you're able to pay it over a 15-year term, all lenders will be able to offer you a lower rate.
The reason? According to the Fannie Mae's "Taking the mystery out of your mortgage", lenders provide better interest rates to borrowers who take out 15-year mortgages because those loans are considered to pose less risk for them.
And while these loans are less risky for lenders, the higher monthly payments that come with shorter-term loans may cause a strain on your bank account. If you determine that you can handle the high payments, however, then the lower mortgage rates associated with short-term mortgages can save you thousands of dollars over the lifetime of the loan.
Tip #4: Get a Few Referrals
Let's say you're shopping around and you find a lender who quotes you a much lower rate than your other prospective lenders. You've struck gold, right? Well, don't start celebrating just yet.
"You may find a lender quoting a very low rate, but they may not be able to deliver as promised," Tierce warns. Some lenders offer quotes before they've fully gauged all the information and details of the loan, Tierce adds. In other cases, lenders may try to get your business by quoting you bottom-of-the market rates that they know they can't deliver.
So what's a savvy homebuyer to do?
Tierce recommends putting together your list of potential lenders by obtaining referrals from people you trust, such as friends or coworkers with positive home buying experiences under their belts. This gives you a better chance of working with lenders who can deliver on their mortgage rate quotes.
And with your money and credit on the line, it's worth it to put the extra effort into finding someone who will look out for your best interests.
Don't be shy about implementing these tips when you're putting together your home buying strategy. Even the smallest change in your mortgage rate can make a significant impact in the total amount of money you end up spending on your new dream home.