If you're looking to buy a home with borrowed money, then you'll want to find the best mortgage rates you can. Here are a few tips to help you.
Decide what you want
First, in order to determine what your best mortgage rates are, you need to decide what kind of mortgage will best suit your needs, as there are different kinds to choose from. There are 30-year mortgages, for example, and 15-year ones -- and, unbeknownst to many, lots of other mortgage lengths, too. (Yes, you can probably get a 20-year or 12-year loan, if you ask.) A 15-year mortgage will offer a lower interest rate, but the monthly payments will be higher. If you want lower monthly payments, a 30-year loan might be preferable, despite its higher interest rate.
The best mortgage rates often appear to be those for an adjustable-rate mortgage, or ARM, but don't be fooled: ARMs sport low initial interest rates, but they're adjusted at certain points in time to better align with prevailing rates. They do lock in the initial rate for a set period, though, before upward or downward adjustments are made, so if you're only planning to be in your home for five years or so, an ARM that doesn't adjust for, say, seven years can serve you well.
There are other mortgage-related choices you can make in order to get the best mortgage rates possible. For instance, you can choose to pay "points" on your loan in order to lower the rate. A point is 1% of the value of your loan, and it will lower your loan's interest rate by roughly 0.25% to 0.40%, depending on the lender. Thus, if you're willing and able to pay a few thousand dollars upfront at your closing, you can enjoy a lower rate for a long time, which will result in significant interest savings, too. Again, though, consider how long you plan to stay in the home; this strategy isn't smart for a short stay.
What's your score?
Like it or not, the best mortgage rates are offered to those who have the best credit scores. The best-known score is the FICO score, which ranges from 300 to 850. At myFICO.com, you can plug in your loan amount and see what average interest rate corresponds to your score. For example, as of June 24, someone with a FICO score of 630 seeking a $200,000 30-year fixed mortgage will be looking at rates near 5.4%, resulting in monthly payments near $1,122. If that person's score were 760 or higher, offered rates would be near 3.8%, with monthly payments near $932 -- a savings of $190 per month, or $2,280 per year.
Your credit score makes a big difference, so check out your credit report (for free, at www.AnnualCreditReport.com) and credit score well before you start the home-buying process. That will give you time to correct any errors that you find and perhaps boost your score via some strategic moves, too.
Lenders will be more likely to offer their best mortgage rates to those who can pay 20% down on their home, those who seem reliably employed, and those whose total debt doesn't eat up too much of their income. In other words, they're looking for borrowers who seem like good bets. Thus, if you're thinking of quitting your job and opening a restaurant, perhaps wait until after you're offered the best mortgage rates. Think strategically. For example, you might decide to aim for a smaller home, which will require a smaller loan, which will permit a 15-year mortgage, which will offer lower rates.
Finally, remember that, depending on your situation, the best mortgage rates for you might not be the absolute lowest ones. Learn more, think about what you need and what you can qualify for, and then shop around for the best mortgage rates that various lenders will offer you.
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