- Mortgage Expert
How to Get a Competitive Interest Rate
You’ve likely heard it all over the news lately; interest rates are higher than they’ve been in decades.
Does this mean you can’t get a competitive rate any longer?
The good news is that you can still get a competitive rate. The bad news is that it may take some work to get there.
Here’s how to ensure you get the lowest rates possible.
Improve your Credit
The better your credit history, the more likely you will get better interest rates. Lenders base the rates they offer on your riskiness, and the first thing they look at is your credit score and/or credit history.
If your credit score is near the minimum required for the loan program, you might not get competitive rates as you could if you had a higher score.
Do what you can to maximize your credit score, such as paying credit card balances down, making sure all payments are on time and clearing up any issues.
Keep your Debt-to-Income Ratio Low
Your debt-to-income ratio measures your current obligations plus the new mortgage payment to your monthly income. A high DTI is riskier for lenders.
Some loan programs allow DTIs as high as 43% - 50%, but the more debt you have, the higher the interest rate you’ll get.
Try paying some debt down before applying for a mortgage to get the most competitive rates. Ideally, your total monthly payments, including the new mortgage (principal, interest, taxes, insurance, and HOA dues), shouldn’t be over 36% of your monthly income.
Make a Large Down Payment
The more money you invest in the home, the less risk the lender takes. They measure your down payment by determining your loan-to-value ratio (LTV).
Your LTV is your loan amount compared to the home's value.
The higher your LTV, the riskier you are to a lender. This is because you have more money borrowed than you invested in the home. As a result, if you have financial struggles, you’re more likely to walk away from the home than if you had your money invested.
Ideally, you’d have 20% home equity or an 80% LTV. This means you invested 20% of the home’s value and borrowed 80% of it. This gives lenders a nice cushion if you default on your loan and they need to sell it to make their money back.
Most lenders still approve loans for LTVs higher than 80%, but the higher your LTV, the higher the interest rate lenders charge.
See how much money you can put down without putting yourself in danger of financial issues. Of course, don’t put every penny down you have, but the higher the down payment, the better.
Have a Stable Employment History
Your employment history plays a big role too. Lenders like it when you have at least a 2-year stable history.
This means you were at the same job for at least two years. This provides lenders with predictability. They know you aren’t likely to keep leaving jobs and potentially being unemployed. This puts lenders at a much higher risk of default.
It can have the same effect if you haven’t been at your job for two years but have been in the same industry for longer than two years. When borrowers completely change industries, it’s risky for lenders because you don’t have the history to prove you can succeed.
Consider Paying Points
Most borrowers do what they can to avoid paying points, but in some cases, it makes sense. For example, with today’s higher rates, you might want to pay the interest upfront and take a lower interest rate to keep your payment lower.
This is good in situations where borrowers plan to stay in the home long-term. But, again, do the math with your loan officer, but typically buying the lower interest rate saves buyers thousands of dollars, depending on how long they keep the loan.
Consider a 2/1 Buydown
If you’re buying from a motivated seller, you may be able to get them to help you with a 2/1 buydown.
In this situation, you buy the rate down for two years. In the first year, you pay a rate of 2% lower than the standard rate, and in the second year, you pay a rate that’s 1% lower.
The rate adjusts to the standard rate in the third year. In the meantime, someone has to make up the difference in the interest payments. Sometimes motivated sellers will make up the difference as a part of the sales agreement. Talk to your seller about the option to determine if you can buy the rate down.
If rates decrease in a few years, you can refinance and never pay the inflated interest rates.
Get a few quotes when you apply for a mortgage, shopping with different lenders. Each lender has different risk tolerances and programs. As a result, one lender might offer a much lower rate than another.
By shopping around, you can negotiate your rate and show lenders what other lenders offer, or you may find a lender with the best rate.
It’s not as hard as it seems to get competitive interest rates today. Even though rates are much higher than last year, there are ways you can minimize the additions lenders add to the rate they quote you.
The key is to provide the least risky situation to the lender. Show that you are a stable borrower who can afford the mortgage payment and wants to invest in a home. The less debt you have, and the better your credit score, the more likely you are to get competitive interest rates today. Plus, you always have the option to buy the rate down if you want to lower it even further.