Looking to refinance or buying the home of your dreams? There’s a lot at stake. Mortgage rates can vary by several percentage points depending on the factors we will look at below. The difference can mean a much higher or lower monthly payment and tens of thousands of dollars in interest payments over the life of the loan.
1. Improve your credit score. A higher credit score shows banks that you’re less of a risk to default on your loan, which means you’ll pay less to borrow money. How much less? Borrowers with the highest credit range, from 760 to 850, looking for a 30-year fixed mortgage would pay $164,000 in total interest, according to myFICO.com, or about $33,000 less than someone with a mediocre score of 660 to 679.
If you need to improve your score, make sure you’re spending no more than 20 to 30 percent of your available credit limit, not carrying credit card debt and paying all your bills on time. Also, get your free credit reports from AnnualCreditReport.com or myBankrate, and look for any mistakes.
2. Have a record of employment. Banks also think you’re less of a risk if you can show at least two years of steady employment and earnings, especially from the same employer. They’ll want to see pay stubs and W-2s. Those who are self-employed, or wrapped up in the gig economy, will have a more difficult time.
Lenders tend to be especially strict when it comes to self-employment income. According to Bankrate, they will require that you document your business income with income tax returns for the past two years. And they will generally have you execute IRS Form 4506, which will enable them to obtain a transcript of your returns in order to verify they are the same ones you sent to the IRS.
3. Be ready to put down some cash. You’ll generally score a lower mortgage rate if you put more money down, with 20 percent being the gold standard. Lenders, of course, accept a lot less than that, but you’ll often have to pay private mortgage insurance, which can range from 0.5 to 2.25 percent of the original loan amount per year. You’ll also want to have two to three months’ worth of cash reserves in a savings account.
4. Go short. An adjustable-rate mortgage with a five- to seven-year low-interest introductory period may make sense for you – but only if you’re looking to sell the house and trade up quickly, aka less than five to seven years. The average mortgage rate for a 5/1 ARM is 3.47 percent as of Aug. 30, compared with 3.97 percent for a 30-year fixed.
5. Go medium. If you’ve found your dream home, or just can’t bear the thought of moving again, consider a 15-year fixed-rate mortgage. The national average is only 3.2 percent. On a $260,000 loan, your monthly payments will be considerably higher ($1,821 vs. $1,237 for a 30-year fixed), but you’ll save $120,000 in interest.
6. Shop around. When searching for the best rate, even for refinancing, you want to play the field. That means not settling with the financial institution where you normally bank. Research online.
Call us and we can point you in the right direction of several qualified local lenders.