Having the best mortgage rate is a key factor for obtaining a home loan. Getting a great rate on a mortgage is a lot more than comparison shopping. This is much higher than your credit score. In fact, the mortgage industry examines many factors to determine whether you qualify for a mortgage, but also what interest rate you will pay.
If you expect to get the best Colorado mortgage rates, then you will need to make sure that you are well qualified.
1. Save for big down payment
When you make a small down payment on a house, the lender considers you a higher risk borrower than someone who reduces payments.
One place where you look to lenders for this risk is with Private Mortgage Insurance (PMI). If you hold less than 20% of the amount on a traditional loan, you will usually have to pay the PMI premium. Unless you have enough equity to cancel it, PMI will affect you in the same way as a higher interest rate: by increasing your monthly payment and your total borrowing costs.
By saving for a large down payment, you can avoid PMI altogether. Even if you can’t put 20% down, you can pay less for PMI with a larger payment. On top of that, a large down payment can actually give you a lower interest rate.
2. Consider a shorter loan term
When you take a 15-year fixed-rate mortgage instead of a 30-year fixed-rate mortgage, the interest rate will normally be lower. For example, in mid-September 2020, the 30-year rate was 2.87%, and the 15-year rate was 2.35%.
You can also consider an adjustable-rate mortgage. Its introductory rate may be lower than the rate you can get on a fixed-rate mortgage. It depends on the market, however: In mid-September, the 5/1 ARM interest rate was 2.96%.
Even though you can get a lower rate on an ARM, you are taking a risk. It could be less expensive in the short term, but it would be more costly in the long run.
3. Improve Credit Score
One of the most effective ways to lower your rate of interest is to raise your credit score. It can also increase your chances of getting a loan in the first place.
Even just a small change in your credit score can make a big change. A look at the recent FICO rate data. If you had a score of 659 and you could bounce it to 680, you could have cut your interest rate by more than 0.60%.
So here are a few simple ways to boost your credit score:
- Pull out your credit report and alert the credit bureau of any errors.
- Request approval to use someone else’s username as a verified customer.
- Request a boost in the credit limit (but don’t use any of it).
4. Apply with at least three lenders
There are literally thousands of mortgage companies competing for your company. So another way to ensure that you get the best mortgage rate is to apply with at least three best mortgage companies and see what the lowest rate is.
Also, every lender is required to give you a loan estimation. This three-page standardized document will show you how much loan you will get in the first five years, along with the loan interest rate and closing costs, as well as other key details.
5. Do not take any big steps
After doing all the work to improve your credit score and make yourself the strongest applicant, you don’t want to do anything that could jeopardize your standing with lenders. This is not the time to switch careers, nor the time to apply for additional credit. When you are approved for your loan then try to keep everything the same.
Any major change in your borrower profile may make you feel risky and force the lender to charge you a higher interest rate or even decide not to mortgage you.