How To Get The Lowest Mortgage Rates Despite The Recent Spike

February 10, 2017 - 5 min read

Rates Falling Since Epic Post-Election Jump

Mortgage rates are dropping for the first time since the election.

Rates were near all-time lows in the summer of 2016. Then, in November and December, they spiked nearly 100 basis points, or one full percentage point.

Now it appears rates are backing off.

This is a welcome breath of fresh air for those shopping for a home loan.

No one knows for sure how long mortgage rates will continue to fall, or even stay at their current levels.

If buying or refinancing a home is in your future, understanding a few “tricks of the trade” can help rate shoppers secure the lowest possible interest rate.

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First, Know Your Credit Score

Your FICO scores remain the standard by which mortgage lenders assess a homeowner’s creditworthiness. It is also the most significant factor when determining your interest rate.

When it comes to mortgages and credit scores, most homeowners have one very important question: What credit score do you need to get the lowest mortgage rate?

FICO scores can range from 300-850. The higher your credit score, the lower your interest rate.

If you want to get the best rates, you’ll need a credit score of 740 credit or better.

The difference between the best and worst rates when comparing a 580 to a 740 score can vary by as much as a full percentage point.

On a loan amount of $200,000 that could mean a payment difference of $160 per month.

Understanding ways to improve your credit score prior to applying for your mortgage could save you tens of thousands of dollars in interest over the life of the loan.

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Put More Money Down

In addition to your credit scores, your loan-to-value can have a considerable impact on your interest rate.

Loan-to-value, or LTV, is the relationship between your loan amount and the home’s appraised value.

For instance, an $80,000 loan on a home worth $100,000 would have an LTV of 80.

The lower your LTV — whether you’re buying or refinancing — the lower your rate may be.

A higher down payment translates to lower risk for your lender. Lower risk means a better rate.

Another important note about down payment. Not only does a larger down payment help you with obtaining a lower interest rate, it also helps with your negotiating power when buying a home.

Generally, lenders and sellers like to see larger down payments from buyers. A larger down payment means a homeowner has more stake in the property.

Consider an Adjustable-Rate Mortgage (ARM)

Adjustable-rate mortgages (ARMs) got a bad rap in previous years.

ARM mortgages often came with prepayment penalties. ARMs would sometimes result in a significant jump in your rate and payment following the initial “teaser rate,” making mortgage payments unaffordable.

Today’s ARMs are different, however. There are limits to how much and how often your rate can adjust.

ARM mortgages can be the perfect option for homeowners looking to “grow into their mortgage”.

For example, if you know you can count on an annual raise, or if you know that your spouse will be going back to work soon, the possibility of a small payment increase a few years down the road may be completely within your comfort zone.

Another important note about ARMs — just because you have an adjustable rate doesn’t mean your rate will always adjust upwards. In fact, many homeowners with ARMs have seen their rates drop in recent years.

Talk to your lender about different ARM options. Depending on you and your family’s situation, an ARM could be a perfect way to get a lower rate.

Consider Paying Points

If you’ve done any research or asked around, it’s likely that you’ve heard plenty of opinions when it comes to whether or not you should pay points to buy down your rate.

A loan discount point is an upfront fee paid to lower your interest rate. One point is equal to one percent of the loan amount.

Generally, by paying one point, you will lower your rate by a quarter of one percent.

If you take out a loan for $175,000 and at the no-points rate of 4.25%, your monthly principal and interest payment would be $860 per month.

If you were to pay one point to buy your rate down to 4.0%, your new principle and interest payment would be $835 per month.

In this scenario, it would cost you $1,750 to save $25 per month. As long as you plan to have your mortgage for longer than five-and-a-half years, there’s a good argument for paying points.

Using this same scenario, if you plan to have your mortgage paid off in 15 years, the savings between year five and year fifteen would be over $4500, even after paying to buy the rate down.

Speak with your mortgage lender about whether or not it makes sense to pay points to buy down your interest rate.

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Skip the Lines at the Bank – Shop Different lenders

Speaking with different lenders is an issue part of shopping for the lowest rate. Fortunately, nowadays you don’t have to go into your local bank to shop and compare.

There are a number of online options available at your fingertips.

For homeowners who prefer a live voice, most lenders will give you a quote over the phone, and then back it up in writing.

A recent study released by the Consumer Financial Protection Bureau (SFPB) shows nearly half of all homeowners do not shop and compare when getting a mortgage loan.

Shopping and comparing is vital, though, to ensure you are getting the lowest rate.

Be sure to compare interest rates and closing costs. You may find lenders that advertise a lower rate, but then also discover there are also higher fees associated with obtaining that rate.

It’s important to remember that interest change daily. As such, it is best to shop and compare on the same day.

A final note regarding your interest rate: don’t forget the importance of locking in your low rate.

Rate locks are time sensitive and rates are constantly changing. Locking sooner than later in a volatile market can save you time, money and unnecessary anxiety about missing out on a great low rate.

Get Today’s Low Mortgage Rates

Getting the best mortgage rate can save you thousands of dollars are on your home loan. Knowing how interest rates work can save you even more.

Compare today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.

Time to make a move? Let us find the right mortgage for you

Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.