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How to Find the Best Mortgage Rate

October 12, 2021

How to Find the Best Mortgage Rate

Buying a home is an exciting prospect. Home loans and mortgages can help people finance a home and turn their dream into a reality. It is essential to find the best mortgage rate possible to avoid paying extra for your home. The overall interest rate and terms of a mortgage directly impact the total amount you spend on your home. A lower interest rate, even by a small percentage, can help you save money while paying back your loan.

Types of Mortgages

There are numerous types of home loans that you can apply for when considering mortgages. Understanding the unique advantages of various loan types can help you choose a mortgage that works best for your individual needs and goals. Exploring several mortgage types can also help you negotiate and secure better and more competitive mortgage rates. While there are many home loan types, some of the most popular loan types include:

  • Conventional mortgages: Conventional loans are conforming loans funded by individual private lenders and are one of the most popular types of mortgages available. One of the main benefits of conventional mortgages is they do not have very strict income, home location or home type qualifications as other loan types. A conventional mortgage can be used for a private home, investment property or even a second home. In some cases, potential homebuyers can pay as little as a 3% down payment.
  • Fixed-rate mortgages: A fixed-rate mortgage is a home loan type with a fixed interest rate that does not fluctuate throughout the loan's life span. This mortgage type is generally recommended for borrowers looking for predictability and those looking to hold onto the property for the long term. For those looking for predictable payments, the monthly principal and interest remain the same from month to month.
  • Adjustable-rate mortgages: On the other hand, an adjustable-rate mortgage is a mortgage type with interest rates that vary depending on the current state of the market. In most cases, an adjustable-rate mortgage features a lower fixed rate within the first few years of owning a home, potentially helping to save a substantial amount of money on interest. Payments may increase or decrease over time, depending on market trends.
  • FHA loans: A Federal Housing Administration (FHA) loan is a type of home loan that makes homeownership possible for borrowers who may have a lower credit score or cannot pay a larger down payment. With an FHA loan, borrowers may be approved even if they have a higher debt-to-income ratio or a lower income.
  • VA loans: Veterans Affairs (VA) mortgages are flexible and low-interest mortgages for active-duty members and veterans of the U.S. Military, as well as their families. The main benefit of VA mortgages is they do not require a down payment or private mortgage insurance, which is required for many other loan types. In most cases, these loans feature relaxed credit requirements and no prepayment penalties.
  • Jumbo loans: Jumbo mortgages are conventional mortgage types that have non-conforming loan limits, meaning the home price exceeds federal loan limits. Jumbo loans are for borrowers looking to take out a larger loan for a more expensive home. Total interest rates are similar to the interest rates of conforming loans. In most cases, jumbo loans require smaller down payments than other loan types.

How to Find the Best Mortgage Interest Rates

How to Find the Best Mortgage Interest Rates

Finding the best mortgage interest rates can help you save money on a home loan. While shopping around and comparing offers is highly recommended, there are other steps you can take to improve your approval odds for a competitive interest rate. Before shopping around for mortgage loans, you can improve various aspects of your finances to be more appealing to lenders.

1. Improve Your Credit Score

Improving your credit score over time can help you land a better interest rate. Credit scores and mortgage rates are closely related, and your credit history can greatly alter the loan you are offered. You can improve your credit score by paying off personal debts, such as car loans, student loans and revolving credit card debt. While lenders may alter the interest rate they offer on a loan due to several factors, even a 20-point difference in your score could be enough to improve your interest rate.

2. Prepare Your Records of Employment

Lenders like to see a record of employment and any earnings you have made in the last few years. Preparing all your records to show your employment status and amount of income for the previous two years can be an excellent thing to bring to a mortgage meeting. When you apply for a mortgage, you also need pay stubs from the last 30-day period and W-2s from your place of employment for the last two years. You must provide additional records if you regularly earn bonuses or commissions.

3. Build a Down Payment

Saving for a down payment is an important step towards owning a home and being approved for a mortgage. The more money you can put down for a house, the lower your monthly mortgage payment will be. Additionally, you will pay less interest over time with a higher initial down payment. While the minimum required down payment varies depending on the mortgage loan type you receive, a down payment of 20% or 30% may mean a lower interest rate.

4. Know Your Debt-to-Income (DTI) Ratio

The amount of debt you have in regard to your total monthly income is known as your debt-to-income ratio. When lenders are looking to calculate your DTI, they look at your income history and current employment. Calculating your DTI is an essential aspect of determining your mortgage. If you can show proof of funds for a full documentation loan, you may be more likely to receive competitive rates than other loans for self-employed borrowers.

5. Use a Mortgage Calculator

Using a mortgage calculator can help you determine the approximate costs of monthly payments depending on the various inputs you provide. To find your ideal mortgage, you can input different information to determine what payments you can afford, a reasonable interest rate and the down payment you would like to save before taking out a home loan.

6. Consider a 15-Year Loan

30-year mortgages are a common home loan type that many borrowers choose. However, you may want to consider a 15-year fixed-rate mortgage if you have a larger initial down payment and want to pay off your house sooner. 15-year loans may also help reduce the amount of interest you pay on a loan throughout its life. You can even refinance your current home with a 15-year mortgage if you choose.

7. Compare Loan Offers

Understanding how to negotiate mortgage rates and compare loan offers can help you decide and find a loan that best fits your situation. In most cases, you should not just accept the first or second offer you are quoted. Shopping around for loans can help you lock in a lower interest rate and save you money. You can talk to your bank while also exploring multiple financing options and lenders online.

8. Lock in the Rate

After comparing offers and interest rates, lock in your preferred rate and move forward with a loan. In some cases, locking in a loan and closing is a process that takes a few weeks. At this time, rates may slightly fluctuate. Once you have signed the home purchase agreement and have secured your home loan, you can ask your lender to lock in your rate. While this service sometimes comes with a fee, it may pay for itself if the rates were to rise.

How to Compare Mortgage Lenders

When you compare mortgage rates and closing costs, you are able to achieve the best home mortgage rate for your needs. A good mortgage rate can help you save money over the life of your loan. You should get multiple mortgage quotes to help you better understand the additional fees and total cost of a mortgage loan. While the interest rate is essential to consider when taking out a loan, there are additional fees and charges you may want to pay attention to.

Potential borrowers should keep in mind closing costs and various fees, including the application fee, credit report fee, appraisal fee and underwriting fee. Borrowers also need to take into account property taxes and government fees. When considering how to get the best interest rate for a mortgage, keep in mind that loan estimates provide you a more detailed look into the total cost of a mortgage loan.

Apply to Multiple Lenders

Apply to Multiple Lenders

It can be challenging to know if you receive a competitive offer if you do not apply to multiple lenders and compare fees and rates. Receiving numerous offers also provides borrowers with leverage when negotiating with other lenders. You may want to consider applying to different types of lenders, including online lenders, banks and credit unions, to compare their unique offers.

It is important to note that multiple applications to several lenders can impact your credit report depending on how quickly you apply to each lender. Comparing mortgage quotes from multiple lenders can help you save money and choose a mortgage that best suits your unique needs. Borrowers who shop around often realize savings over the course of their loans.

Shop for Loans Within a Timeframe

Shopping around for multiple mortgage loan offers can help borrowers save money and receive the lowest mortgage fees. Getting the best mortgage rate often involves extensive research and comparing multiple lenders. To receive multiple offers while keeping credit inquiries to a minimum, you can request all offers within a 14-day timeframe.

Before applying for loans, you should research the various lenders you want to apply to and prepare any relevant information you may need. Preparing beforehand can maximize the number of mortgage lenders you can apply to within the timeframe. Applying to mortgage lenders outside of the grace period can negatively impact your credit score more than a singular inquiry can. Make sure you know the timeframe you have to apply to lenders without affecting your score.

Compare Loan Estimates

Compare Loan Estimates

A mortgage lender provides a loan estimate with a mortgage quote detailing the general terms and fees of the loan. Loan estimates can help you determine the lender who offers the most competitive or beneficial loan by the total cost, allowing you to choose a loan that suits your needs. While a mortgage may seem ideal, hidden fees or closing costs may make the loan more expensive than other options.

On average, a closing cost is typically 3% to 6% of your loan amount. This percentage may be smaller for larger loans. For example, a home loan for $100,000 may run at a 6% rate. On the other hand, a $500,000 loan may be more likely to run at a 3% rate. In some cases, lenders even have flexibility in the fees that they charge for a loan. Some lenders may be willing to cover part of your closing costs or even roll them into your loan amount when refinancing.

Secured Mortgage Rate — Next Steps

After you have found the interest rate and loan that is right for you and applied for the loan, you are on your way to securing your mortgage. Within the first three days of applying, you'll receive a loan estimate detailing all the critical information of the mortgage loan. The loan estimate will include information on closing costs, which, at this stage, will only be estimates. The final numbers will be determined once the sale of the house is complete.

As you review this loan estimate, you can ask your lender any questions you may have if you need clarification on details. Next, your lender's underwriting team reviews your application and provides the final decision if you are approved for the mortgage. During this decision process, you may be asked to provide additional information or documentation. The underwriting department may also need you to answer a few questions, so monitor your emails or calls.

During this time, it is important not to make any significant changes to your finances or employment situation. Applying for a credit card, switching jobs, making a large purchase or taking out a car loan can all significantly alter your approval odds. If possible, you should avoid any large changes until after the approval process is complete.

If your mortgage loan is approved, you are on your way to closing on your home. On the other hand, if your loan is rejected, you will learn about what influenced this decision to better prepare in the future. While you can reapply for a mortgage with another lender as soon as you want to, it is generally recommended to wait to avoid harming your credit. Additionally, making positive changes to your finances can improve your approval odds.

As you near the closing date on your home, you will be provided with a closing disclosure with all the finalized loan terms with the exact closing costs and interest rate. You should confirm that the rate in the document matches the rate the lender initially quoted you. It is important to note that rate locks are typically only valid for a certain period of time, so it is essential to work with your lender to avoid any potential discrepancies or delays towards closing on your home.

Work With SK Builders to Create Your Dream Home

Work With SK Builders to Create Your Dream Home

At SK Builders, we are proud to build homes and help you achieve your goals of homeownership. We continue to serve each of our clients with the utmost care and are committed to efficient design, quality craftsmanship and customer satisfaction. Our homes range from cozy starter homes to the ultimate forever homes, and we strive to build houses where you can create lasting memories.

Find your forever home and explore our financing options or contact us online today.

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