How to Get the Best Mortgage Interest Rates
Many American aren't very familiar with mortgage interest rates and how they are determined. However, for those buying a home or refinancing one, understanding what influences the interest rate you receive could save you a lot of money in the long run.
What Affects Interest Rates
Simply put, interest is what you pay in exchange for the right to use another's money. Typically interest is a percentage of the whole amount being borrowed. However, many factors influence mortgage interest rates, some of which you have control over and others you don't.
Mortgage-Backed Securities and Interest Rates
The biggest influence on mortgage rates' fluctuations is the "secondary market." These are the companies like Freddie Mac and Fannie Mae, pension funds, securities dealers and insurance companies. They buy mortgages from the original lenders and group them together into mortgage-backed securities that they then sell to investors.
When the sell of mortgage-back securities slows, mortgage interest rates then go up, because lenders can't sell their loans to investors at lower interest yields. In other words, while lower interest rates are good for the borrower because it's less you have to pay on a loan, at the same time the secondary market investor will make less on the loan. So lower interest rate loans are less desirable and if no one's buying lenders will raise interest rates to make them more attractive.
When the economy is less stable or other investments such as stock are more costly, the investors buy what's available on the secondary market so they won't possibly get stuck with lower yields later. In turn mortgage rates start to trend down again.
Obviously this is all out of your hands as a borrower; the best you can do is keep an eye on trends in the financial market and try to time it right.
Your Credit and Mortgage Interest Rates
While the secondary market affects base interest rates, the interest rate a lender offers to an individual is largely determined by their credit history and personal finances. Your income, assets and debt will all be carefully scrutinized when applying for a mortgage loan.
The lender is trying to estimate the best they can how much home you can afford and your ability to pay the debt off on time. The tips below offer advice on how to make yourself a desirable loan candidate in the eyes of lenders.
Strategies for Getting the Best Mortgage Rates
There are, however, a few things you can do to get the best mortgage rates:
- Shop around. This is likely to be the biggest financial decision you're going to make. Just like many other goods and services, comparison shopping for a lender is a surefire way to find the best deals. Interest rates aren't written in stone. Different lenders will have different options and they'll often negotiate if they know you're talking to multiple lenders.
- Fix your credit report. As mentioned above, your credit score will greatly affect the interest rate that you're offered. Regardless of your current score, all borrowers should clean up their credit report as much as possible before looking for lenders. The credit reporting agencies (Experian, Equifax and TransUnion) do make mistakes that can negatively impact your credit score. To avoid these problems get a copy of your credit report and go through it point by point. If you find mistakes or obsolete information, get ready to take it up with the reporting agency, complete with documentation to back up your claim.
- Pay your bills on time. Lenders are much more cautious these days, and risky borrowers will not get the best mortgage rates. More than anything else, they want to make sure you're going to pay your note on time, and late payments on anything (by even a few days) are red flags. Lenders use your repayment habits to gauge how responsible a borrower you are. If you repeatedly make late payments not only will you not get the lowest mortgage rates, you may not get the loan at all.
- Pay down your credit card balances. If you've got a credit line of $10,000 on your credit card and you have a $5,500 balance, you have a debt-to-available-credit ratio of over 50%. Lenders view anything over 50% as a sign of a risky borrower that may take on more debt than they can manage. Reducing your balances to less than half the credit limit on all of your cards will have a significant and immediate effect on your credit score.
- Hold off on applying for any more credit. Lenders are going to look at your credit report, and every inquiry you make about additional credit will show up. Too much activity makes lenders leery that you either plan to take on more debt soon, or that you're having trouble getting credit already. Each inquiry can also lower your credit score by as much as 12 points (especially if you are denied credit).