If youre looking to buy a home, the best way to make sure you get the lowest mortgage rate possible is to shop around for your loan. That doesnt mean simply choosing the lender that advertises the lowest rate; it means getting personalized quotes from lenders to see what they offer.
Your credit score is one of the most important factors in determining your mortgage interest rate, and it can have a big impact on the amount youll pay for the life of the loan. If your credit score isnt where it should be, you can boost it by addressing any negative items on your credit report or disputing inaccurate information that may be listed there. It also pays to keep your debt-to-income ratio low, since that will help you qualify for the lowest interest rates available.
Credit scores are calculated based on several different factors, including payment history, amount owed, types of credit and more. Generally, youll need a score of 740 or higher to qualify for the best mortgage rates available.
Boosting your credit before you apply for a mortgage is the most obvious way to ensure you get the best mortgage rate, and its something you can do on your own. But its also worth considering some of the things that can affect your mortgage interest rate and your ability to qualify for it in the first place, such as your down payment and loan-to-value ratio.
A better credit score can open more mortgage options and lower your interest rate, especially if youre a first-time homebuyer. And it can also help you avoid private mortgage insurance, which is a separate monthly fee that you might be required to pay if your down payment is less than 20% of the purchase price.
Another option is an adjustable-rate mortgage, or ARM, which usually offers a lower introductory interest rate but can rise after the introductory period ends. That can cause your monthly payments to go up — substantially, in some cases.
Discount points are fees borrowers often pay to reduce the interest rate on their mortgages. These fees typically range from 1% of the loan amount to 0.25%, although they can vary. They are sometimes included in the initial loan offer, but theyre not always, so ask for them to be added on to the original quote.
Shopping around for your mortgage can mean a lower interest rate and big savings, according to Freddie Mac. Borrowers who get at least one additional rate quote save an average of $1,500 over the life of the loan. And those who get five rate quotes can double that savings.
Before you start applying for a mortgage, you can use a mortgage calculator to estimate how much house you can afford and what kind of payments you might make. Armed with this knowledge, you can focus on the home search and get the mortgage thats right for you.
A good starting point is the NerdWallet mortgage rate table, which lists the national averages for each loan type, along with the best rates in each region. Its updated every Wednesday and Friday, so you can compare rates as you work through the home buying process.