Would-be homeowners know that finding the best mortgage rate – that’s the annual interest rate you’ll pay on your mortgage – is one of the most important first steps towards homeownership.
Signing on to a mortgage with a good interest rate means you’ll save money every month, and over the entire life of the loan. Here’s what to do to make sure you’re getting the best deal on your mortgage.
How to find the best mortgage rate
1. Find out your credit score
In case you hadn’t heard, your credit score is the key to most financial opportunities. Keeping your score in the good to exceptional range will unlock the best (and cheapest) financial products, including rates on things like, you guessed it, a mortgage. You can check your credit score for free with Credit Karma, Credit Sesame, Credit.com, or FreeCreditReport.com.
2. Work on raising your credit score
If your credit score is poor or fair, consider waiting to apply for a mortgage until you can get it higher. Depending on the type of mortgage product you go with, you could be locked into that interest rate for the life of the loan (unless you refinance, but that’s a topic for a different story).
This equates to thousands of dollars over the years, so the lower you can get your interest rate, the more money you’ll be saving. Use some simple tactics to improve your credit, such as:
- Reigning in your spending on your credit cards (you should be doing this anyway if you’re about to apply for a mortgage and buy a house)
- Becoming an authorized user on someone else’s account (who has good credit and spending habits)
- Avoiding opening any new credit cards, at least during the home-buying process
3. Look into first-time home buyer and other assistance programs
States offer different programs and grants for first-time home buyers and those with incomes under a certain threshold that can provide help with down payment and closing costs, as well as offer loans that come with low or no interest.
There are also VA loans, offered by the Department of Veterans Affairs, as well as USDA loans, available in some rural and suburban areas from the US Department of Agriculture. Consider, too, an FHA loan, available to many types of home buyers who have at least 3.5% to put down for a down payment.
There are typically income limits and other stipulations for these types of loans, but they could be worth it if you qualify. The Department of Housing and Urban Development keeps track of different home-buying assistance programs by state.
4. Save up a decent down payment
Remember that the more money you put down to purchase your home, the less you’ll need to borrow to pay for the rest of it. Borrowing less money equals paying less in interest over the life of the loan, too.
Plus, depending on the type of mortgage you go with, most lenders require customers putting less than 20% down to pay private mortgage insurance on top of their monthly mortgage and interest payments. This acts as financial protection to the lender in case you aren’t able to pay your mortgage.
How much house can you afford? Use this calculator to find out:
5. Wait until you have a solid record of employment to show
Besides your credit score and a solid down payment, lenders also like to see a record of steady employment and earnings when it comes to offering the best mortgage products.
If you can show two years or more of steady income through pay stubs and W-2s, you’ll be more attractive to your potential mortgage lender than someone who has a spotty work background.
6. Understand your different mortgage rate options
Traditionally speaking, when applying for a mortgage you’ll have two options – a fixed-rate mortgage or an adjustable-rate one.
Fixed-rate mortgages offer the consumer an opportunity to always know what their monthly mortgage payment will be, since the interest rate on this loan is set for the life of the loan.
An adjustable-rate mortgage, on the other hand, starts with one interest rate and, after an introductory period, can fluctuate based on the market. These mortgages typically start off with a lower introductory rate than what you’ll be offered with a fixed-rate mortgage, but keep in mind that they can rise – sometimes by quite a bit – over time.
You’ll also have the option to pick between a 30-year or 15-year mortgage. While a 30-year loan may mean smaller monthly mortgage payments right now, if you can swing a 15-year loan you’ll pay it off more quickly, which means paying less in interest (a lot less, usually) over the long haul.
Be sure to ask for all the details for every type of mortgage product your potential lender offers before settling on one.
7. Research different mortgage companies
Before actually applying for a mortgage, ask friends and family for recommendations on mortgage brokers and do some searching online. Some obvious places you might want to consider include your bank and your car and/or renter’s insurance company (if they offer mortgage products).
If you can narrow your options down to a list of places that come highly recommended by others – or that you’ve enjoyed as a customer for other products – you’ll be off to a good start. You may also have to use a certain lender if you’re interested in pursuing an assistance program or other, non-conventional mortgage option.
8. Use online rate calculators to see what your options are
Online mortgage calculators are a great way to get an initial sense of your rate options. Just enter your income, location, down payment amount, and a few other details and the calculator will populate your potential options from different lenders.
Try this mortgage calculator from our partners:
9. Apply for multiple mortgages
Once you’ve done your research, raised your credit score, and have a decent down payment and work history, you’re ready to start applying for a mortgage. Although you can submit multiple mortgage applications at once, be sure to apply for mortgages with your approved list of lenders in a short period of time.
Applications for a mortgage can negatively impact your credit score, but, according to NerdWallet, the three big credit bureaus will count all of the applications as one loan application if you apply quickly, generally within 14 to 45 days of each other.