Trying to secure a low mortgage rate can be difficult. However, there are four ways to lock a good rate through your own merits.
Mortgage rates are affected by many factors out of people’s control. The market reacts differently to changes in the economy. It can be difficult knowing when to go out into the market to buy a house.
However, there are four ways to lock a good rate through your own merits. Furthermore, these strategies can be done beginning at a young age, years before considering buying a house.
Credit Score
Perhaps the most obvious way to reduce one’s mortgage rate is to have a very strong credit score. The real estate market informs people what mortgage rates for 30-year loans are, assuming people have a credit score of 700-719.
As of March 2024, the average US citizen had a credit score of 705. Thus, it makes sense for the market to provide information on mortgage rates at a credit score in between 700-719.
The good news is that people have control over their credit scores.
Someone with a credit score of 760 can cut their mortgage rate by around 0.5%. It may not seem like much, but it can be the difference between having a 7% mortgage rate or a 6.5% for example.
There are many ways to improve one’s credit score, which will be covered on a separate post. The main thing is to begin borrowing money as early as possible to build up that score. In two or three years, someone’s credit score can definitely go up to 780 and above.
Bigger Down Payment
From the point of view of the lender, there is a risk associated with lending money to someone. As a result, someone’s credit score is super important, but so is the down payment amount.
The less money someone needs to borrow, the less risk involved for a lender. Consequently, less risk means a lower mortgage rate needed to compensate the risk of default. However, that doesn’t mean someone should put in a 50% down payment or higher.
Debt is cheaper than equity, meaning in the long run, borrowing more money to buy a house will end up being cheaper than putting in more money and still borrowing.
Thus, the sweet spot for a down payment is in between 20%-30%, for those who can afford it. It is important to remember there are monthly expenses to account for, aside from the mortgage payments.
The last thing someone needs is to put a higher down payment and live off check by check for their payments.
Shopping Around for Mortgage Rates
When people are looking for a mortgage rate they should inquire at many different banks.
A rule of thumb is that the larger banks, even if people have banked with them for a while, will provide the highest rates. On the contrary, local and smaller banks tend to offer the lowest mortgage rates.
Think about it, most people bank with the big-name banks such as Citi and Bank of America. There aren’t many people who bank with a local bank because they don’t have an international (or even national) outreach.
The only way these smaller banks can compete with larger banks is through mortgages. Thus, these small banks compete by offering generously lower mortgage rates. It’s worth exploring different options for a good rate.
Income Stream
Any lender has to check how someone will repay the loan they take. Above all, the lender needs to assess if the person has the capacity to repay the loan with interest.
For that, the most important thing is the borrower’s yearly income statement. If someone can’t afford to pay a mortgage month over month, the loan won’t be made. As a result, it is a good idea for someone who wants to buy a house to focus on increasing their monthly income.
In fact, the stronger the income stream is, the more comfortable the lender is, which can reduce the mortgage rate. Remember, less risk of default means a lower mortgage rate is needed. If there are ways someone can increase their income, it should be strongly considered before purchasing a house.
As mentioned above, mortgage rates are factors of not only the economy, but also the borrower. Credit scores, the down payment, income levels, and ultimately the lender are important factors in securing a lower mortgage. In these difficult times, it is important to do everything in one’s power to get the lower rate.
