At Solarity Credit Union, we’re always on the lookout for ways to help borrowers get a great mortgage rate. Many people just assume they have to accept the rates they’re given, even if the rates are high. But we’re here to show you there’s a better way—in fact, there are a number of better ways. Read on to find out more about the ways you could get a lower mortgage rate and see which of the different options might be perfect for you.
1. Improve your overall financial standing
Even when rates are high, lenders are more likely to reward applicants with good financial standing. When you apply for a mortgage, you provide the lender with a number of documents. Employment and income history, W-2s, two months of bank statements and a list of any debts will help lenders determine if your finances make you eligible for home loan pre-approval. The better your finances, the better your options.
One way to improve your financial standing is to manage your debt-to-income ratio, or DTI. Ideally, this will show you have steady employment and few debts. While exact percentages vary, most lenders want a DTI that is less than 43%.
2. Improve your credit score
The higher your credit score, the better interest rates you’ll be offered.
There are a number of ways to improve your credit score. Pay your bills on time and avoid opening new lines of credit right before you apply for a mortgage. You can also check your credit reports ahead of time to make sure no errors are holding your score back.
A very effective method of raising your credit score is paying off debt, such as previous loans or credit cards. This can improve both your credit score and your DTI. Taking the time to increase your credit score may wind up delaying the homebuying process for you, but it will ultimately be rewarding when you receive lower interest rates once your credit score is in better shape.
3. Look into shorter loan terms
Many people incorrectly assume a 30-year mortgage is their only option. However, to get a lower rate, you might want to consider a shorter term. A 15-year mortgage, for example, will often have better interest rates than a 30-year loan.
The reason a shorter loan could get lower mortgage rates is that you are promising to pay off the loan faster, which in turn means there’s less chance of you defaulting on your loan.
4. Utilize specialized loan programs for lower rates
Even when rates are high, some lenders offer eligibility-based loan programs with a variety of benefits, including lower interest rates. Specialty programs at lending institutions make homeownership more attainable. At Solarity, for instance, we offer first-time homebuyer, no-down-payment and low-down-payment programs with competitive interest rates.
With these options, borrowers don’t have to pay the traditional 20% down payment when securing a mortgage. Instead, they can purchase a home with as little as 3% or even 0% down. This allows buyers to save money initially and purchase a home sooner while still having lower interest rates.
Another option to get a lower mortgage rate is through a USDA home loan. Whether or not you qualify for this loan program depends on location and income, but it’s worth taking the time to see if you’re eligible.
5. Opt for an adjustable interest rate
When you secure a mortgage, you have the option of two types of interest rates: adjustable and fixed. With a fixed-rate mortgage, your loan has the same interest rate from closing to final payment. The interest rate of an adjustable-rate mortgage (ARM), however, fluctuates throughout the life of the loan, based on a specific economic metric, such as LIBOR.
Although the interest rate of an ARM does have the potential to increase, often, the initial rates are lower than fixed rates. Initial rates usually stay steady for the first one month to five years, only adjusting after that period. An adjustable-rate mortgage can be advantageous if you only plan to live in the house a short time and then sell before the rate adjusts, or if you expect your income to increase in the near future so that you’re prepared if your monthly payment grows. You also have the option to refinance and change to a fixed-rate loan should it be more appropriate down the line. Whatever your future plans are, an ARM allows borrowers to start out with a lower mortgage rate.
6. Refinance to adjust your current interest rate
So far, we’ve discussed methods for achieving a lower mortgage rate from the get-go, but what if you already have a home loan and are looking to reduce your current rate? Is that possible? Yes! Refinancing your home loan is a popular way to lower your current mortgage rate.
Homeowners generally refinance to change the terms of their mortgages. The right changes can result in reduced interest rates. Consider the ways to get a lower mortgage rate listed above. Refinancing if your financial situation has improved, when your credit score has increased, to switch to a shorter loan term or to convert to an adjustable-rate mortgage all have the potential to result in a lower interest rate than you’re currently paying.
For some homeowners, a cash-out refinance can be the perfect way to get a lower mortgage rate when rates are high. However, there are some potential risks with this option that you should be aware of. Most notably, you are borrowing against your home, making your house your collateral. If you fail to repay your new mortgage, your lender could foreclose on your home. Another potential downside is that you could end up owing more than your home is actually worth. This is known as being “underwater.” Be sure to weigh the risks and advantages to decide if a home loan refinance is for you.
Need more help deciding which way of getting a lower mortgage rate is right for you? Want more in-depth discussion about your options? The home loan experts at Solarity Credit Union are happy to help. Speak with a Home Loan Guide to discuss your options for a lower mortgage rate and explore the many home loans available to you.