Before we start, here’s a quick recap on interest rates.
Your lender charges interest on the money borrowed for 2 reasons. 1) So that they can make sure they get paid if the loan goes into default. 2) It’s how they make their money.
Your interest rate directly effects how much your monthly mortgage payment will be. Basically if 2 people have the exact same loan amount, but one has a 5% rate and the other has a 3% rate. The loan with the higher interest rate will have a higher monthly payment.
The main component that determines your interest rate is your credit score. Higher credit scores allow you to get the best interest rates available, versus lower credit scores which yield higher interest rates. If you find yourself in a situation with less than desirable credit then you may want to try to pay down some debts before applying for a mortgage. Lenders take credit scores very seriously, because it portrays how good you are at handling your money. Long story short, good credit = lower interest rate!
Lender’s also take into account your debt to income ratio when considering your interest rate. Calculating your DTI is pretty simple. The lender does this by looking at the proposed mortgage payment and then adding all of your monthly liabilities to that. They get these numbers such as car payment, student loans, and credit cards from your credit report. Then, they divide that number by your monthly gross income and you get your DTI in the form of a percentage. As a general rule of thumb, your DTI should be below 50%. They will review your credit report to spot any late payments, missed payments, and credit inquires over a certain period of time. If the lender sees you as a reliable borrower, they are more likely to trust you with a lower interest rate.
There is one other option you have if you want a lower interest rate. You always have the option to buy down your rate. Most borrowers don’t go this route because it can get very pricey. Lenders charge origination fee’s and points to buy down a rate that is below the “par.” The par rate is the lowest rate you can get without paying origination fees, which is typically the route most borrowers take. Also, with Loan Pronto, each rate over the par rate comes with a lender credit we give you to help cover closing costs!
To recap, a few factors go into getting you the lowest interest rate including your credit score, DTI, and ability to buy down a rate if you want. One of the most important things you can do as a borrower is ALWAYS shop your mortgage. We encourage our customers to get a second opinion so that you are able to compare offers, fees, and closing costs. Doing your research can end up saving you THOUSANDS at the end of the day.
Also, its important to keep in mind that the market is the main determinant of how high or low interest rates are on any given day. For example, right now in 2019, rates are at the lowest point they have been in 2 YEARS! A borrower may have purchased their home when rates were higher than normal, and that’s okay, because you can always refinance! So don’t worry, you don’t ever have to be stuck in a bad rate!
Check out our Through the Lends video here to see how even dropping your interest rate by a small percentage can save you thousands over the life of the loan!
Take a look at our checklist to see the basic documents you’ll need to apply.