So you’re ready to buy a home and want the best possible mortgage rate. Or maybe you already received some loan offers and want to see if there’s a better deal out there before you start signing on the dotted line. There are a lot of different mortgage lenders out there, and some may be more competitive than others. It’s worth your time to find what the best mortgage rates are in your area before shopping for your rate.
1. Build your credit score
Your mortgage rate and the interest you pay will be closely tied to your credit score. If you’ve never checked out what your credit score is, then it’s time to do so. This will give you a starting point in assessing what type of interest rates you’ll be offered when buying a home and help guide you in the direction of making any necessary financial changes to improve your standing.
2. Save for your down payment
An important factor in determining the interest rate on your mortgage is how much of a down payment you can make. A larger down payment typically means you’ll qualify for a lower interest rate, which over time typically means you’ll pay less in interest and make fewer monthly payments.
When it comes to your mortgage, a higher down payment could mean a lower rate, so it could be a great time to start saving for a larger down payment to maximize your savings and get lower mortgage rates.
3. Compile information regarding your income and employment history
Whether you’re looking to find the best mortgage rates or secure financing to buy a home, it’s important that your income and employment history be as transparent as possible. That means keeping old pay stubs and tax returns for past years on hand in case you need to prove your income. It could stop you from losing out on the home of your dreams.
You’ll need to show at least two years of steady income and employment before you can apply for a mortgage. You can boost your qualifications by making sure your recent employment is steady and that the length of time between jobs is not extensive.
4. Calculate your debt-to-income ratio
A high debt-to-income ratio means that you are more likely to miss payments if interest rates rise. Lenders are able to see your DTI when they look at your credit score. You can calculate your DTI easily by dividing your total monthly housing payments by your monthly gross income. This gives you a snapshot of your housing expenses in relation to your income, which can help you decide whether you are ready for a larger home.
For example, if your gross monthly income is $5,000 and you spend 40% or less on all combined debts like housing and credit cards, the lender will see you as low risk and approve you for a low-rate mortgage. Your DTI would be $2,000 / $5,000 = 40%. On the other hand, if you spend 50% or more of your gross monthly income on all debts combined, the lender will see you as a high-risk customer and charge you a higher rate. The calculation in this scenario would be $2,500 / $5,000 = 50%.
5. Calculate your mortgage loan using a mortgage calculator
A mortgage calculator is a great way to start. With this tool, you can see what your monthly payments would look like based on several factors, including down payment and credit score. Be sure to include “add-ons” like private mortgage insurance (PMI) in your calculations. When you find a loan with an interest rate that works for you, make sure the lender offers you the same terms when you apply for credit—otherwise, it’s not really the best deal!
A mortgage calculator is the easiest way to get a feel for what your potential monthly payments might be on any new mortgage. Using one online on mortgages.co.nz, for example, is easy and free, and it will help you figure out if there are options that would trim your costs or just better meet your current situation.
6. Take into account interest rates and closing costs
The interest rate is just one element to consider when deciding on a mortgage. Total costs have a significant impact on the overall cost of your loan. In addition to the interest rate, you should also compare closing costs, including origination fees and settlement charges. The total costs can add up to several thousand dollars.
There are many mortgage options available, but some have higher interest rates and prepayment penalties. Others may be less expensive overall, even though the interest rate is a little lower. Find a lender with a diverse set of options to help you find the home loan that works for you.
7. Think about private mortgage insurance
Private mortgage insurance (PMI) is required if you put down less than 20% on the purchase of your home. PMI protects the lender’s investment in the event that you stop making payments or default on your loan. The way it works is that every month, an insurance company will send you a bill for your monthly PMI payment. You are also responsible for paying your monthly mortgage payment.
All of these can have a big impact on your monthly payments, so be sure to check the total annual cost out before applying.
4. Decide on a course of action
When you’re shopping for a mortgage, the best deals require you to move quickly. Once you’ve visited some lenders, visited some websites and compared some rates, it’s time to make a decision. This is the point at which you let your lender know that you’re interested. The time between applying for a mortgage and locking in an interest rate can be as little as 24 hours on some loans, so if you’re close to making a decision, do so quickly.
The Bottom Line
The process of getting a mortgage can be long and hard. To make it easier, do your homework well in advance. Before you even look for mortgages, start gathering the documents you’ll need to prove your income, assets, employment, and creditworthiness—the first steps to getting a mortgage. And an excellent first step is to use a free online Mortgage Calculator to help decide how much you should save for a down payment.