Get A Lower Mortgage Rate by Improving Your Loan Profile
If you’re right in the middle of shopping for a home loan or getting ready to, no doubt you have already starting looking at interest rates. Each lender has their own set of published rates, but are there factors about the borrower’s situation that can affect the rate the lender offers them? Yes.
Mortgage lenders have different rates for the very same program. One applicant may be eligible for a 30 year fixed rate of 4.00% and another, 3.75%, on the very same day for the same loan type. What’s going on?
Every lender looks at the same factors when figuring a borrower’s final interest rate. Here are the most common aspects of your loan file that determine your rate, and how to tweak your situation slightly to get a better rate.
This obviously makes sense as someone who has an excellent credit history should be rewarded for their efforts with a better rate. Prior to the introduction of credit scores, the ability to determine “average, good and excellent” credit was in the eyes of the underwriter but today credit quality is determined by the credit score.
Lenders award lower rates for those with higher scores. Rates adjust by 20-point tiers. For instance, borrowers with a score between 640 and 659 will get the same interest rate, all other things being equal. But a borrower with a 660 score will get a better rate, even though her score is only one point higher. If you apply for a mortgage, see if your score ends with a “9”. If so, there’s a chance you could clean up your credit slightly to get a one-point improvement for a lower rate.
Cash Out Refinance
When borrowers decide to refinance a mortgage to get a lower rate, lenders will charge a bit more should the borrowers decide they also want to pull additional cash out during the transaction.
VA loans allow for cash out, sometimes up to 100% of the home’s value, based on a recent appraisal. VA cash out loans come with slightly higher interest rates than do VA streamline refinances because of their added flexibility. But for some, the extra cash is worth the extra cost.
A discount point is equal to 1% of the new loan amount. For instance, one point on a $200,000 loan is $2,000. Paying points can reduce the interest rate. This is often referred to as “buying down” the rate. A borrower should estimate how long he plans to be in a home. Then he should figure out how many months it will take to make back the cost of the points.
For instance, if you pay $2,000 in points and it reduces your payment by $40 per month, it will take 50 months, or 4.2 years to make back your money. If you will be in the home for less time, do not pay discount points.
The interest rate lock is the length of time the lender will guarantee the interest rate for you. Most lenders will only allow you to lock in a loan that is currently being processed along with a selected property.
The longer you wish to lock in the rate the more expensive it will be. If rates are expected to stay low, it’s a good idea to lock as close to the end of your loan process as possible. A 10-day lock period will come with a better rate than a 60-day lock.
Getting the Better Rate
Sometimes your credit score is holding you back from getting a great rate. You may want to pay your credit balances down and continue to make timely payments. After some time, your scores will rise.
But a mistake would be assuming you can’t qualify, or that your score is too low to get a great rate. Even those with less than perfect credit today are getting better rates than most borrowers received in the past 40 years, just because rates are so low right now.