21 Jul Finding the Best Mortgage Rates
How to Get the Best Mortgage Rate
There’s no denying that every penny counts in today’s financial landscape, and that goes for potential homebuyers as well as homeowners looking to refinance their current mortgage. It can be stressful trying to calculate how much you can save – or not – based on a fraction of the percentage of the current mortgage rate on any given day. You may also wonder how much, if any, control you have over those mysterious numbers.
What is a Mortgage Rate?
As is the case with any substantial loan, a homeowner will be required to pay interest on top of the principal, which is the cost of borrowing. In addition to the interest rate, you’ll want to be aware of the APR, or annual percentage rate. This includes lender fees, points or closing costs that give a broader measure of the overall loan.
While you’ll see a lot of buzz about the Federal Reserve lowering or raising interest rates, they don’t actually set mortgage rates. They adjust short-term interest rates based on facets of the national economy like inflation and job numbers. Although independent, mortgage rates tend to move in the same direction as the Fed rates, which have been historically low in the past year. Given the current COVID-19 crisis, the Federal Reserve has indicated that interest rates will continue to remain low and accessible.
There are multiple factors that determine mortgage rates, including the government and the bank or lender. However, the good news is that you, the borrower, have some agency in how much it will ultimately cost to secure the best loan.
How Do You Get the Best Rate?
Another aspect of the interest rate is determining whether to go with a fixed rate or adjustable rate mortgage (ARM). You will probably get a lower rate with an ARM but since you can’t control the market fluctuation, this is usually a preferred program for shorter term plans.
Likewise, you’ll want to look at the APR and your projected timeline when purchasing or refinancing because the fees are spread out over the length of the loan. Considering the term of your loan? If you’re able to manage a larger monthly payment, a 15-year mortgage typically offers lower rates, saving you thousands in the long run.
The three main elements a mortgage lender will look at when determining your own rate will be credit, income and loan-to-value:
The all-important FICO score tells the bank what your risk level is. A score of 670 is considered the average. Most lenders work with all levels of credit standing, but the higher your score, the lower your rate. Some ways to keep that number strong include making payments on time, keeping your credit balance owed at or below 30% of your credit available, and checking periodically for errors with the reporting agencies. If you’re planning to purchase or refinance in the near future, don’t apply for anything new until after.
Steady employment is also a favorable consideration when financing. Borrowers will be asked for at least two years of pay stubs or W2s, or if you’re self-employed, tax returns and P&L statements. Additionally, your debt-to-income ratio will reflect well on your mortgage rate so make sure you’re not owing more than you bring home.
When refinancing your existing mortgage, lenders will look at your home’s equity and loan-to-value ratio (LTV). In other words, the more your home is appraised for, versus how much you refinance, the lower your rate. Refinancing can also be a wise decision by saving even a half a percentage point, resulting in a lower monthly payment, eliminating the PMI, reducing the term of the loan, or all of the above!
What is the Best Rate?
With interest rates changing every day, and mortgage products varying by lender, there is no simple answer. We at EnTrust Funding (ETF) encourage you to shop and compare in order to find the most competitive mortgage and refinance rates, as well as tackling the qualifying factors we discuss above that can give you some control over your own mortgage options.
Because rates can fluctuate during the process, it can also be a good idea to lock in your rate. If you have more questions about refinancing and achieving that ideal mortgage rate, give us a call today for further guidance. Meanwhile, stay safe and healthy.