How to get the best mortgage rate

When shopping for a mortgage, one of the most important features to consider is the interest rate on the loan. A few percentage points on a loan you’ll be paying back for the next 15 or 30 years can make a difference of thousands of dollars over the life of the loan. If you’re in the market for a mortgage or you plan on buying a home sometime in the future, these tips can help navigate getting a better mortgage rate.

1. Maximize your credit score

The best way to get a low interest rate on a home loan is to improve your credit score. In the months leading up to your mortgage application, concentrate on boosting that magic three-digit number by using your credit cards responsibly. This means paying every credit card bill on time, not opening new credit card accounts, regularly checking your credit report for errors and keeping your credit utilization under 30%. You’ll also want to make serious progress toward paying down excessive credit card debt if it’s hindering your ability to save.

2. Save a bigger down payment

The more money you put down on your new home, the greater your chances are of obtaining a lower mortgage rate. While lenders may accept lower down payments, a down payment equal to 20% of the home’s total value may position you as a responsible borrower and net you a lower rate as a result. Putting 20% down also means you’ll avoid paying PMI (Private Mortgage Insurance), which tacks an additional cost onto your monthly mortgage payments.

3. Borrow less than you qualify for

As tempting as it is to borrow as much as possible, be mindful of how that might affect your interest rate and the overall cost of the loan. Having a higher debt-to-income ratio can negatively affect your rate and other home costs, especially if mortgage insurance is required.

4. Choose a shorter-term loan

Most people think of mortgages as a 30-year loan, but a 15- or 20-year mortgage can actually be a better choice for many homebuyers. A mortgage with a shorter term nearly always has a lower rate than a 30-year mortgage from the same lender. The monthly payments will be significantly higher when compared to a 30-year mortgage, but the overall interest paid on the loan will be significantly lower. As a bonus, you’ll build equity in the home faster and own your house free and clear in half the time! 

If you already own a home, you may want to consider refinancing to a 15-year mortgage. You’ll pay off your loan sooner and, with a lower interest rate, you may not see much of a difference in your monthly payments.

5. See what additional fees or incentives your lender can offer

Before closing on a mortgage, it’s important to understand all the fees and related costs you’ll need to pay beyond the down payment; for example, closing costs and title fees. Be sure you can afford these additional costs before signing on the dotted line. 

It’s also a good idea to ask about any incentives your lender offers that can help bring down your mortgage rate. Most lenders give borrowers the opportunity to purchase discount points, which allow the borrower to lower their mortgage rate by a fraction of a percent for each point purchased. Points are priced typically at 1% of the loan amount, or $1,000 for every $100,000 you borrow. 

Inquire about other incentives your lender may offer as well, such as  first-time homebuyer programs  or assistance with fees. For example, Desert Financial offers up to  $7,500 toward closing costs  when you participate in the Home Plus program. ¹  

When you’re shopping for a new home, it’s easy to get wrapped up in choosing the perfect pad. But you also want to make sure that you choose the right mortgage for your needs. Obtaining approval for a mortgage with a low interest rate means saving on interest payments for years to come. If you follow the steps outlined above, you’ll be much closer to scoring a mortgage with the best possible rate!