The Wall Street Journal had a report this weekend on how to snag the best mortgage rates. While some of the tips you’ve probably heard before, I thought it was worth sharing. With rates at historic lows and real estate prices ready to rebound, it seemed like a good time to review the basics.
What Determines Your Mortgage Rate?
There are seven factors that will determine the interest rate you get on a mortgage:
- The FICO credit score of each borrower
- Home price and the amount of the mortgage
- The amount of your down payment
- Property location
- Loan term (e.g., 15 year vs. 30 year)
- Type of interest rate (e.g., fixed vs. variable)
- Loan type
(Source: CFPB). To this I’d add one more factor–your lender.
Let’s take a look at each of these factors, and what it takes to qualify for the best mortgage rates.
1. FICO Credit Score
We’ve talked about this before. Improving your credit score is the single best way to save money on everything from home loans to car loans to even car insurance. With a mortgage, a good credit score can easily save you tens of thousands of dollars over the life of the loan. The best mortgage rates go to those with a FICO score of 760 or better.
Improving your score is a matter of paying bills on time and keeping the amount of credit you’re using to a minimum. That’s sometimes easier said than done, but over time your score should improve. You can check out a list of tips to increase your credit score for more details.
If you don’t know your FICO score, there are several ways to get it. First, you can buy access to your score directly from myFICO. It’s not expensive and you get your FICO score from all three credit bureaus.
If you don’t want to pay for your score, many credit card issuers offer free access as well. You’ll find a list of credit cards that offer credit score access here.
Finally, you can get free access to credit scores through Credit Karma. The score is not based on the FICO formula, but it does a good job of replicating the FICO score. It also provides great information on ways to improve your score. And as I said, it’s free.
Consider Shorter Loan Terms
The WSJ article suggested that you can opt for a 25-year mortgage as a way to get a lower rate. I actually tried that with my last refi, but the rate wasn’t any lower. In fact, the rate was the same even for a 20-year mortgage as compared to the 30-year loan we ultimately chose.
You do, however, save on interest when you go down to a 15-year mortgage. The downside of course is a much higher payment. There are other factors to consider when deciding on a 15 vs. 30-year mortgage, but it is worth considering as a way to lower your rate.
Get Several Quotes
This one is simple. It’s easy to compare mortgage rates online. In addition, if you are refinancing, it’s always worth checking with your current bank to see what they can offer. It pays to get at least three quotes, if not more.
Increase Your Down Payment
While the WSJ didn’t mention this one, I think it’s an important consideration. You’ll typically get the lowest rates if you have at least a 20% equity cushion. Anything less than this and your rates go up and you’ll pay private mortgage insurance (PMI). We paid PMI on our first home, and the extra cost just goes right out the door. Saving a 20% down payment isn’t easy, but it will save you a lot of money in the long run.
Here are some additional resources you may find helpful: