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Here are five things you can do to reduce your mortgage rate when you refinance or purchase a home:
- Add one point to your credit score. Most non-government mortgage programs are priced by credit score, in 20-point tiers. If your FICO is 680 points, for example, you pay significantly less than if it’s 679.
- Don’t rule out an adjustable rate mortgage (ARM). If you don’t expect to keep your property (or your mortgage) for more than a few years, an adjustable rate mortgage (ARM) could get you a very low rate for a set period of time.
- Close faster. The shorter your mortgage lock period, the lower your costs. Typically, mortgages are quoted with 30-day locks. If you lock for 60 days, you’ll pay higher fees, so it pays to close quickly.
- Borrow less. Your interest rate is partly based on your loan-to-value (LTV). The LTV is a ratio that compares your property value and loan amount. The lower this ratio, the less you’ll pay, because lower LTVs are less risky for mortgage lenders.
- Shop more. A 2012 Stanford University study concluded that consumers who obtain at least four mortgage quotes save nearly $2,700 in fees for a $200,000 home loan compared to those who only got one or two quotes.
Make ultra-low rates even lower
You can’t control many of the factors that influence mortgage rates.
Fortunately, nearly every external force is pushing rates down at the moment.
Mortgage rates recently dropped again, and are now hovering just above the all-time low reached in 2012.
But even with current ultra-low rates, you can change things about your profile to take your rate even lower. From your credit scores to your application readiness, you can get a more affordable rate than you were expecting.
Here are five things you can do to reduce your mortgage rate when you refinance or purchase a home.
1. Add one point to your credit score
Yes, you can save thousands in mortgage costs by adding as little as one point to your current FICO score.
That’s because most non-government mortgage programs are priced by credit score, in 20-point tiers. If your FICO is 679 points, you pay significantly more than if it’s 680.
The chart below shows fees associated with credit tiers as a percentage of the loan amount. An applicant can raise their score above the previous tier, thereby reducing fees. These numbers are based on a 10 percent down, $300,000 mortgage.
|Fico Score||Fees||"Next Tier" Savings|
The fee savings can translate into lower rates, as well as lower costs.
How do you add a handful of points fast? It depends on the reason your FICO is lower than it could be. If you made a credit card payment more than 30 days after it was due, that can bring down your credit score significantly.
If incorrect information is hurting you, ask your lender to use a rapid rescore – a service that corrects bad information within days – so your FICO reflects only your correct history. The cost is between $25 and $50 per account, per credit bureau.
So, correcting one account could cost up to $150, but it might be worth it to get you to the next mortgage rate tier.
If you don’t have much credit, try becoming an authorized user on an account belonging to a family member or good friend with excellent credit. You don’t actually use the account, but the owner’s good payment history becomes part of your credit report and score.
If you carry credit card balances, pay down your balance to 30% of the limit to raise your FICO score fast.
2. Don’t rule out an adjustable rate mortgage
While 30-year fixed mortgages are the most popular home loans, they aren’t the only game in town.
If you don’t expect to keep your property (or your mortgage) for more than a few years, an adjustable rate mortgage (ARM) could get you a very low rate for a set period of time.
For instance, a 7-year ARM is fixed for seven years, then starts adjusting based on the market at that time. The same applies for 3-year and 5-year ARMs.
You enjoy the lower introductory rate, then sell or refinance before the loan begins adjusting.
The chart below shows sample rates for 30-year-fixed loans and 3/1, 5/1 and 7/1 ARMs for a $300,000 mortgage. The savings are calculated based on the introductory periods.
|Loan Type||Mortgage Rate||Payment||Savings||"Teaser" Period Savings|
|3-Year ARM||2.250%||$1,147||$159||$5,724 (in 3 years)|
|5-Year ARM||2.5%||$1,185||$121||$7,260 (in 5 years)|
|7-Year ARM||2.75%||$1,225||$81||$6,804 (in 7 years)|
The savings of an ARM can be substantial while it’s in its teaser period. After the adjustable-rate mortgage enters its adjustment period, however, savings can reduce or evaporate.
3. Close faster
The shorter your mortgage lock period, the lower your costs.
Typically, mortgages are quoted with 30-day locks. If you lock for 60 days, you’ll pay higher fees — about one-quarter to one-half percent of your loan amount extra for a 60-day lock.
Instead, you can opt for an interest rate about .125 percent higher. If you can close sooner, however, you’ll usually get a lower rate.
How do you close faster? Review your credit report and correct errors in advance. Use the lender’s report to check for errors, or pull your own credit at the Annual Credit Report website, a free site established by the government.
Assemble the documents your lender will probably need. Tax returns, W-2s, pay stubs, account statements, explanations for credit glitches, business licenses, homeowners insurance and other documents are routinely requested by lenders. Have them ready upfront.
4. Borrow less
Your interest rate is partly based on your loan-to-value (LTV). The LTV is a ratio that compares your property value and loan amount.
For instance, a home worth $100,000 with an eighty-thousand-dollar loan has an LTV of 80.
The lower this ratio, the less you’ll pay, because lower LTVs are less risky for mortgage lenders. As of this writing, one national lender offers applicants with excellent credit a 0.50% discount to rate for an LTV of 85 rather than 95.
In addition, keeping the LTV at 80 percent or lower allows you to avoid mortgage insurance premiums, which can add a hundred dollars or more to your monthly payment.
5. Shop more
A 2012 Stanford University study concluded that consumers who obtain at least four mortgage quotes save nearly $2,700 in fees for a $200,000 home loan compared to those who only got one or two quotes.
Try to get your quotes on the same day, because mortgage rates can change very quickly. Ask lenders for a Loan Estimate, which is a standardized document used by all mortgage lenders. It lists the loan’s costs and obligates the lender to be accurate.
Some lenders prefer to provide “worksheets” or “scenarios,” which offer fewer protections for mortgage shoppers.
Mortgage rates today are a bargain. With a little effort up front, you can pay even less when you buy or refinance your home.
What are today’s rates?
Rates are scraping bottom and defying all expectations. Will rates go lower? It’s impossible to tell, but consumers who get a rate quote now will obtain some of the lowest mortgage rates ever seen.
Get a quote and lock in your home purchase or refinance rate. Quotes are quick, and don’t require a social security number to get started.