Looking to buy a home but worried about getting stuck with a high mortgage rate? With the right preparation and negotiation tactics, you can secure the most competitive rate available. This guide covers everything you need to know to lock in the lowest rate when financing your dream home.
What Impacts Mortgage Rates
Mortgage rates fluctuate daily based on a variety of economic factors. Key drivers include:
The Federal Funds Rate: Set by the Federal Reserve, this benchmark rate influences the interest banks charge each other for overnight lending. When the Fed raises or lowers this rate, mortgage rates tend to follow suit.
Bond Market Yields: Mortgage-backed securities trade on the bond market. As yields rise or fall, so do mortgage rates.
Inflation: As the cost of goods and services increases, lenders raise rates to offset the risk of inflation eroding investment returns.
Employment Levels: Low unemployment signals a strong economy. This gives lenders confidence to offer lower rates. High unemployment leads to higher rates.
Consumer Credit Profiles: The stronger a borrower's credit score and history, the lower the risk and interest rate for lenders.
5 Proven Ways to Get the Lowest Possible Rate
With some strategic preparation, you can maximize your chances of qualifying for the lowest rate. Here are 5 tips:
Improve your credit score. Aim for at least a 740 FICO score. Pay down balances, dispute errors on your credit report, and avoid new credit inquiries.
Shop around with multiple lenders. Compare rate quotes and negotiate for the best deal. Consider credit unions, community banks, and online lenders.
Increase your down payment. Lenders offer lower rates to borrowers who make larger down payments, signaling lower risk. Shoot for at least 20%.
Lower your debt-to-income ratio. Lenders look for ratios below 36%. Pay down debts and avoid new loans leading up to your home purchase.
Consider buying points to lower your rate. You can pay an upfront fee to “buy down” your interest rate, usually by 0.25% per point. Crunch the numbers to see if it makes sense long-term.
Choosing Between Fixed and Adjustable Rates
One key decision is whether to opt for a fixed or adjustable-rate mortgage. Here’s how they compare:
Fixed-Rate
- Interest rate remains constant over full loan term
- Predictable monthly payments
- Makes budgeting easier
- Penalty for prepayment/refinancing
Adjustable-Rate (ARM)
- Initial teaser rate transitions to variable rate
- Payments fluctuate with rate adjustments
- Lower initial payments possible
- Benefits if refinancing before rate adjusts
Fixed rates provide stability while ARM rates offer lower initial costs. Compare current rate differences and consider your plans to determine the better option.
Leveraging Government-Backed Loan Programs
Don’t overlook government-backed loans like those offered by the FHA, VA, and USDA. These programs help qualified buyers secure competitive rates with lower down payments. FHA loans only require 3.5% down. VA loans require no down payment for veterans. USDA loans promote home ownership in rural areas. Learn more to see if these programs can help score you a great low rate.
The Bottom Line
While mortgage rates rise and fall with the markets, you have power to influence the rate you ultimately receive. Improving your credit, shopping around, increasing your down payment, and leveraging the right loan program for your situation can lead to substantial mortgage savings over the long haul. With the right prep work and negotiation, you can lock in a wonderfully low rate on your dream home.