You'll likely pay less for a loan with a lower mortgage rate.
When you’re planning to buy a home, there are a lot of numbers to keep track of. One of the most important numbers is the mortgage rate. Two buyers who purchase houses for the same sales price can end up paying very different amounts over time depending on their mortgage rate. Here’s what a mortgage rate is, and how to get the best one for you.
A mortgage rate is the rate of interest for a given loan, expressed as a percentage. It’s important to note that this differs from the annual percentage rate, or APR, which includes the mortgage rate, as well as other costs associated with the loan.
Tidy up your credit.
Few things are as important to getting a good mortgage rate as your credit score. That little number is a very big deal; it tells lenders a lot about your financial history, and it indicates how well you’ve managed credit in the past. A better credit score means you get a better rate.
A perfect credit score is 850. A credit score of 700 or above means you’re in pretty good shape. And while some conventional lenders will offer mortgages to applicants with credit scores in the mid-600s, a lower score will mean a higher interest rate.
To boost your credit score, order your credit report and carefully review it. If you see errors, you can request to have them removed, and if you identify any outstanding debts you weren’t aware of, you can pay those off. Over time, by paying all your bills on time, your credit score can go up.
Improve your debt-to-income ratio.
Your debt-to-income ratio matters almost as much as your credit score. It is calculated by adding up all of your monthly debt payments and dividing it by your gross monthly income.
The magic number to aim for is 43 percent or lower. A higher ratio tells the lender you could have more difficulty making payments. There are a few ways to improve this number. For example, you can pay more toward your debt each month, to pay it off more quickly. Or you could take on an additional job to boost your monthly income. And make sure not to take out any additional debt.
Keep your employment steady.
If you’re thinking about job hunting, put it off until after you buy your home. Mortgage lenders like to see an employment history that shows stability. If you’ve stayed committed to a job for a long period of time, you’re more likely to stay committed to paying your mortgage—and to have the income to do it.
Make the biggest down payment you possibly can.
Your mortgage rate is based on all sorts of factors, including how much money you are able to put down on the home. Your down payment will determine the home’s loan-to-value ratio. The more of the house you’ve paid for yourself from Day One—meaning, the more home equity you have—the easier it is for a lender to consider you a good bet.
Be sure to shop around.
No two lenders are alike. You shouldn’t assume the first mortgage rate you’re offered will be the best option. You might shop for a lender yourself, or have a mortgage broker help you find the best loan for your home purchase. Trulia also has a tool where you can compare rates from multiple lenders, all in one place. When comparing mortgages, be sure to review both the mortgage rate and each loan’s APR. The APR is the most accurate way to compare one loan to another.