1. Fix any wrong or outdated information in your credit report
The #1 factor that has the greatest impact on what you'll pay for your mortgage interest rate is what your credit score is reported as. Lenders will review your score from one or all of the three major consumer credit agencies (Equifax, Experian, Trans Union). To have the best chance of getting the lowest rate from home mortgage lenders, view your credit report online for free to spot errors. It may incorrectly list closed credit card accounts as open, satisfied debts as outstanding, or wrong address information that could prevent you from being approved for a home mortgage. It is critical to check your credit report for errors before applying for home loans!
2. Immediately decrease your debt to income ratio
When applying for a home mortgage loan, lenders will calculate much debt you have outstanding in relation to how much income you earn. This debt could include your new home mortgage, credit card debt, student loans, car loans or alimony and child support. If it falls outside the accepted percentage level a mortgage lender has set, generally 36%, your home loan rates can increase. The ratio calculated by multiplying your annual salary by .36 then dividing by 12 (months). This is your debt to income ratio. If your ratio is above 36%, the only way to reduce it is to payoff part of your current loans or increase your income.
3. Decrease your loan-to-value ratio "put more money down"
This ratio compares the value of the home to the size of your requested loan. Stated simply, the less money you put down for your home mortgage loan, the higher interest rate you may pay. Lenders always want to decrease their risks when lending money so the less they have to loan in relation to a house's appraised value, the less risk they have and the better home mortgage rate you'll receive.
4. Lower the level of credit you are approved for
Lenders may consider your home mortgage loan higher risk and quote you a higher interest rate if you are approved for a high amount of credit, even if you don't use any of it. This could happen if you have several credit card accounts open that you don't use or keep for emergency. Having the ability to borrow alot of money on your credit cards scares lenders since they don't know if you'll max out your debt load after being approved for a home mortgage loan and be unable to meet your home loan payments. Cancel any credit cards you don't need to lower your available credit lines.
5. Buy the type of house lenders offer decreased interest rates for
A home mortgage loan for a single family home usually has a lower interest rate than a two family home. Condominiums, apartments, and mobile homes may have also have different rates. Lenders see these different types of home loans as having different risks and price their home mortgage rates accordingly.
6. If possible, live in the house you are applying for a home loan for
A home mortgage provider will generally lend, offering the best loan rates, to owners that live in their primary home full-time and not rent it or use it part-time as a vacation home.
7. Pay more points up front to reduce your long-term interest payments
The total interest paid over the life of a home mortgage loan can be reduced substantially by paying more points up front. This option benefits homeowners who plan to keep their home for several years. A point is equal to 1% of the total approved loan amount, i.e. one point on a $100,000 loan is equal to $1,000 that would be paid at the loan's closing. Here's an sample calculation to show how much could be saved over the life of a $150,000 loan by paying one point vs. no points, up front;
|30 Yr. Loan ||No Points ||1.0% Points |
|Loan amount ||$150,000 ||$150,000 |
|Interest rate ||5.5% ||5.0% |
|Point cost ||$0 ||$1,500 |
|Monthly payment ||$851 ||$805 |
|Total payments ||$306,666 ||$289,883 |
|Interest saved ||$0 ||$16,722 |
The difference in interest paid over the life of these loans is $16,722 while up front points cost is only $1,500! This loan would only have to be held for 32 months to break even on the initial $1,500 points cost. After that, this home mortgage loans savings would be earned for the next 27 years!
8. Get pre-approved for a loan so you have more negotiating strength
This option won't lower the interest rate a home mortgage loan lender will give you BUT it can lower your monthly payment by helping you to pay less for a house. When making an offer on a house, if a seller knows you are pre-approved for a loan, they may accept a slighter lower offer if they believe you have the ability to close your home loan in a short period of time. They may have received another slightly better offer from a home buyer that hasn't been pre-approved and has minimal financial resources. Many homeowners prefer to negotiate with a buyer that can help them sell their house quickly to release their debt burden and move to their new home with less delays.
9. Apply for an Adjustable Rate Mortgage (ARM)
Adjustable Rate Mortgages have the benefit of initial lower interest rates than 30 year fixed mortgages. How they work is that your interest rate is fixed for a period you chose, usually 6 months, 1,3,5,7, or 10 years. This initial fixed rate will be approximately 1.5 to 2 percentage points lower than a 30 year fixed mortgage loans rate. After the initial locked period, the interest rate will change relative to a financial index.
As an initial savings comparison, a 30 year fixed home mortgage loan with a 5.25% interest rate would have a monthly payment of $828. An 5/1 adjustable ARMs monthly payment would be $729 per month in the first 5 years with a 4.15% interest rate. This $100 monthly savings could be used to buy a larger house or enable a home buyer to finance a larger down payment.