Anyone who is planning to buy a home is seeking to find the best mortgage rate possible - this is a huge factor when talking about overall financial health. That's understandable, given that a small fluctuation on your mortgage interest rate can have repercussions of tens of thousands of dollars, since it's multiplied over a large sum across many years.
Here are some of the most important tips that you can use so you can get your best mortgage rate according to Trulia:
Boost your credit score
Lenders would only look at your credit score (shows your creditworthiness) and from there decide to either continue reading your mortgage application or toss it in the reject bin. Most of the time, the best mortgage rate is handed to people who have a score of 740 and above. How do you achieve that score, you ask?
There are five factors to consider when you are looking at improving your credit score: your payment history (35%), length of account history (15%), recent credit applications (10%), types of credit used (10%), and credit utilization ratio (30%). Simply put: Pay your bills on time.
If possible, avoid getting new credit accounts six months in your mortgage application and maintain your oldest credit card accounts even if you no longer use them.
Also, keep your credit utilization ratio to no more than 20%; so if you have a $10,000-dollar credit limit, you should aim to carry a balance of no more than $2,000.
Improve your debt-to-income ratio
Your "front-end" and "back-end" debt ratios are also factors of interest for the lenders. When talking about front-end ratio, this is the percentage of your pretax monthly income that goes to your mortgage payment. It should not be more than 28%.
The proportion of your income that goes toward all debt payoff, like student loans, car loans, and more is called your back-end ratio or "total debt-to-income" (or DTI). Ideally, you should keep it to no more than 36%. One way to pass yourself as a good borrower is by taking care of your other debts so you can improve your DTI as well as your credit utilization ratio.
Consider a short-term fixed-rate mortgage
You have good chances of getting the best mortgage interest rate by opting for a fixed rate, 15-year mortgage, than a fixed-rate, 30-year mortgage; you can enjoy interest rates as much as 0.8% lower compared to its 30-year counterparts.
Don't think that a 15-year mortgage will have you paying double what you would've paid on a 30-year mortgage. Principal, interest, taxes, and insurance are four elements that consist a mortgage, and regardless if it's a 15-year or 30-year loan, the last two elements remain the same.
Weigh fixed- vs. adjustable-rate mortgages
Adjustable-rate mortgages (ARMs) are locked for the first few years, with a cap on the allowed adjustments afterward. For instance, a 5/1 ARM locks the interest rate for the first five years, and usually at a much better rate lower than a 15-year fixed.
Pay for points
Your lender can give you a lower mortgage interest rate during the life of the loan if they can collect money upfront - these deals are referred to as "points". Each point is equivalent to 1% of the borrowed amount, and the more points you buy (meaning, the more you pay), you can get a lower interest rate. In other words, the longer you expect to hold the loan, the more it makes sense to pay for points.