After falling for decades, mortgage rates may be on the rise again. Granted, it’s still nowhere near the 15 percent or more of consumers who paid 30-year fixed-rate mortgages in the mid-1980s. Yet it is important to get the best possible mortgage rate. So that’s what we’ll dive into here.
Compare current mortgage interest rates
What determines your mortgage interest?
Seven factors determine the interest you will receive on a mortgage:
- The FICO credit score from each borrower
- The price of the home and the amount of the mortgage
- Location of the property
- The amount of your down payment
- Loan term (e.g. 15 years versus 30 years)
- Interest rate type (eg Fixed vs. variable)
- Type of loan
(Source: CFPB). To this I would add one more factor: your lender.
Let’s take a look at each of these factors and what it takes to qualify for the best mortgage rates.
1. FICO credit score
Improving your credit score is the single best way to save money on any type of financing – from home loans to car loans and even car insurance. With a mortgage, a good credit score can easily save you tens of thousands of dollars over the life of the loan. The best mortgage interest rates go to those with one FICO score of 760 or higher.
What do you need to do to improve your score? Start taking these steps right away:
- Pay all your bills every month on time. If you have any data on late payments, please ask for it goodwill adjustments to have them removed from your credit report.
- Pay off your recurring debts. The less ongoing debt, such as credit card debt, you carry, the higher your credit score will be.
- Do not apply for too much new credit. Applying for a lot of credit will affect your score, so keep it to a minimum, especially right before applying for a mortgage.
These are the top three tips to improve your credit score. But you can watch this longer list of tips for more details.
If you’re good at paying your monthly payments on time, you should sign up for Experian Boost ™. This is a faster way to increase your credit score. Paying your utility bill or your mobile bill on time can boost your FICO® score. The best part is that it is free to use!
Disclaimer for Experian Boost – Results may vary. Some may not see improved scores or chances of approval. Not all lenders use Experian credit records, and not all lenders use scores influenced by Experian Boost.
Find out more: Read our Experian Boost Review
If you don’t know your FICO score, there are several ways to get it. First, you can buy direct access to your score from myFICO. It’s not expensive, and you get your FICO score from all three credit bureaus. Since each agency’s credit report may look slightly different, it can give you a better idea of what potential lenders will actually see.
If you don’t want to pay for your score, many credit card companies also offer free access. You will find a list of credit cards that provide access to the credit score here.
Finally, you can access credit scores for free through sites such as Credit Karma. The score is not based on the FICO formula. But it replicates the FICO score well. It also provides great information on ways to improve your score. And like I said, it is free.
If you’re not ready to apply for a mortgage just yet, it can be a good idea to start with the free options. But just before signing up, consider paying FICO for your actual credit scores and reports. That way you can identify possible last-minute problems in detail.
2. House price and mortgage amount
The cost of the home and the amount financed also affect the mortgage interest. Here, mortgage loans mainly fall into one of three categories (source: FreddieMac):
- Conform: These are loans of $ 424,000 or less.
- Super Conform: For those living in certain expensive parts of the country, mortgage loans can go as high as $ 636,150 for a single unit and still qualify as super compliant.
- Jumbo: Mortgages that exceed the limits of Conforming and Super Conforming.
The key here is that, all else being equal, a compliant loan will have a lower rate than a super compliant loan. And a super compliant loan has a lower interest rate than a jumbo mortgage.
Using our mortgage interest toolI found the difference between a conforming mortgage and a jumbo was nearly 50 basis points.
In short, if you want the lowest possible mortgage interest rate, opt for a compliant loan if possible. If you live in a particularly expensive area, you may have to opt for a super compliant loan instead.
3. Location of the accommodation
As mentioned above, expensive parts of the country qualify for super compliant mortgages. In those cases, the rates will be lower than if the mortgages were jumbo loans. Buying in a rural area can also have a unique impact on your borrowing options. Search for mortgages to see what different lenders have to offer for your area of the country.
4. Down payment
Lenders want not take as much risk as possible. The more risk you let them take, the more interest they charge to limit their potential losses. This means that if you have more equity in the house in advance, your interest will be lower.
Think about it: you buy a house and default on the loan a year later. Is the lender more likely to get their money back if you put down 5 percent or 20 percent down? A larger down payment means that the lender is more likely to get their money back during a foreclosure sale if you don’t honor the loan.
5. Loan Terms
Again, lenders will typically give you a lower interest rate if they are mitigating their risks. So a shorter term will generally lower your interest rate – often significantly. You may pay much less interest on a 15-year note versus a 30-year mortgage, although you will get a higher return for it.
Interest rate isn’t the only factor to consider when choose between a 15 and 30 year mortgage. But it is an important one.
6. Fixed versus variable rate mortgages
Whether the interest is fixed or variable affects the interest. All other things being equal, a variable rate mortgage starts with a lower interest rate than a fixed rate mortgage. Just remember that a variable rate mortgage will disappear up in an environment with rising rates. And if rates go up significantly, so can your payment.
Mortgages with an adjustable interest rate can be another way to take advantage of low rates. An option like a 5-1 ARM, where your rate is fixed for five years and then varies annually thereafter, typically starts with a lower interest rate. But again, in a rising interest rate environment, your interest and payment will also rise.
7. Type of mortgage
There are many different types of mortgage products. In addition to commercially available mortgage products, there are VA, FHA and USDA loans. Each of these mortgage products comes with unique terms and requirements. The mortgage interest also differs from product to product.
Some of these programs are specifically designed for low-income homebuyers. In these cases, you must meet strict income requirements. But in return, you can set an interest rate below the market rate or even a longer term.
However, if you don’t meet the income qualifications, it might be best to go with a conventional loan. Loans like the 30-year FHA mortgage can come with weird extra costs. For example, the FHA loan costs PMI for the life of the loan. (Most loans are set up to get rid of PMI after you build 20 percent equity in the home.)
So who gets the best rates?
So when you look at all of these categories, what do you need to do to get the absolute best mortgage rates available? Meet these qualifications:
- Have a credit score of 800+
- Take out a loan for less than $ 424,000.
- Live in a relatively affordable area, but not in an area that needs special mortgage considerations.
- Drop at least 20 percent.
- Opt for a 15-year loan.
- Choose a variable rate.
- Unless you qualify for a specialized program at a lower rate, opt for a conventional loan.
Not many borrowers will check all these boxes. And, frankly, not all of you are in control of these things. And they may not make a significant difference anyway.
So the best option is to:
- Improve your credit score as much as possible.
- Buy an affordable home.
- Save a 20 percent deposit.
- Choose the loan product that suits you best.
There is no magic formula here. Lenders just want to make loans to those who are the least risky. So make sure you look more attractive to lenders, and they will reward you with a lower interest rate.
Receive various quotes
This one is simple. It’s easy to do compare mortgage rates online. In addition, when refinancing, it is always worth checking with your current bank what it has to offer. It pays to get at least three quotes if not more.
LendingTree is a great place to start. It provides a great comparison engine to find the best mortgage interest rates for your needs.