Getting the best possible rate on your mortgage is a key part of the home buying process. Even a slightly lower rate could save you thousands of dollars over the life of a loan.
Keep an eye on mortgage rates.
When you begin considering a home purchase, start keeping an eye on mortgage rates. They tend to fluctuate based on federal interest rates, bond prices and what’s going on in the housing market.
Lenders start with the par rate, then look at your risk profile to determine what rate they will offer you—usually based on a combination of the following factors:
- Credit score – This is the first and biggest factor a lender considers. The better your credit score, the better rate you can get. It takes an excellent score—usually 740 and above—to get the best possible rate. Learn more about credit scores.
- Down Payment – The more money you have to put down, the less risk a lender will associate with approving a loan for you, which could qualify you for a lower rate.
- Loan terms – In general, a shorter loan term will let you secure a lower interest rate.
- Loan to Value Ratio (LTV) – This is the difference between the loan amount you are requesting and the appraised value of the home you’re purchasing. The higher the LTV, the higher the rate.
- Points – Lenders allow you to pay points in order to get a lower interest rate. Typically, each point represents 1% of the loan amount.