Taking these three steps could make all the difference in your interest rate.
Mortgage loans are large debts that are paid back over a long period of time. That means even when you qualify for one at today's record-low mortgage rates, you're still going to end up paying tens of thousands of dollars in interest over the life of the loan. And you'll make a hefty monthly payment to a creditor for the better part of your working life.
Obviously, you don't want either your monthly payment or total interest costs to be larger than they need to be. That's why it's so important to do everything you can to get the best possible mortgage rate. The good news is that there are three surefire steps you can take to help you qualify to borrow at a rock-bottom rate.
1. Shop around
There's a surprising amount of variation in rates and qualifying requirements from one mortgage lender to another. If you get a quote from only one, or even just a few, you could be doing yourself a disservice by missing out on the chance to get the lowest rate possible.
Most lenders allow you to get a quick rate quote online without a hard credit check, and it's a simple matter of filling out a form or two. Take advantage of that chance and get quotes from at least three lenders -- and potentially even more. The more quotes you get, the more confident you can be that you're getting the best deal.
2. Improve your credit
Lenders reserve their best rates for well-qualified borrowers, so make sure you're one of them. A credit score around 720 to 740 and above should help you get the most competitive rates -- but even if you can't raise your score that much before buying a home, you still want to do as much as possible to get it as high as you can.
There are a number of steps you can take to give your score a boost. You can pay down debt, ask creditors to remove past negative information, correct errors on your report, or ask someone with great credit to list you as an authorized user on their credit card. Take as many of these steps as you can before you apply for a loan so you can show your lender that you aren't a major borrowing risk.
3. Choose a shorter repayment timeline
Mortgage loans that are paid off in a shorter time period generally have lower interest rates than loans with longer terms. For example, while average 30-year rates have hovered close to 2.7% in recent weeks, the average interest rate on a 15-year mortgage has been closer to 2.2%. That's a huge difference when you're taking out a loan totaling hundreds of thousands of dollars for more than a decade.
Say, for example, you borrow $300,000 for 30 years at 2.7%. You'd be looking at a monthly payment of $1,217 and total interest costs of $138,0456. But if you opted for the 15-year alternative at 2.2%, your monthly payment would go up to $1,958 but your total interest costs would drop to $52,390.
Much higher monthly payments are the price of a short-term loan. After all, you won't make nearly as many payments, so each one needs to be larger. But if your goal is to get the lowest possible rate, choosing the shortest loan term you can comfortably afford is the best way to do it. The low rate will save you money over time, as will paying interest for a much shorter period.
Ultimately, if you have good or excellent credit and you shop around, you should be able to get a great rate right now on any fixed-rate loan since rates are close to record lows. But if you want the absolute lowest rate possible -- and the lowest total interest costs possible -- a 15-year loan is likely your best choice.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.