Although mortgage rates have remained relatively stable in recent months, they still exceed the expectations of homebuyers.

However, there’s no need to lose hope. While a volatile interest-rate environment certainly adds complexity, purchasing a home is not solely dictated by economic trends. It’s crucial to search for a home and a loan that aligns with your financial and personal circumstances. Luckily, there are strategies to position yourself for the most favorable mortgage rate, even in a high-rate climate.

The interest rate on your loan is determined by various factors such as your down payment, credit score, the appraised value of the home you’re purchasing, and the loan term. We will guide you on how to find the best mortgage rate for your home purchase.

Tips for securing the best interest rate on your mortgage

When considering your options, it’s important to position yourself for success in your loan application and secure the best mortgage rate possible. There are three key factors: your credit score, your income (which is assessed through a debt-to-income ratio), and your assets.

Are you ready to discover the steps to securing the lowest interest rate on your mortgage? Follow this step-by-step process to find out!

1. Take steps to improve your credit score

Improving your credit score is an important initial move if you’re looking to secure a lower mortgage interest rate. Although a lower credit score won’t necessarily disqualify you from obtaining a loan, it can significantly impact the terms of your borrowing, potentially leading to higher costs.

To qualify for a conventional mortgage, a minimum credit score of 620 is typically required. However, borrowers with credit scores of 740 or higher are eligible for the best mortgage rates. Generally, lenders offer lower interest rates to those they have more confidence in to repay on time.

To boost your score, ensure timely bill payments and reduce or eliminate credit card balances. If carrying a balance, aim for no more than 20-30% of your available credit limit. Regularly monitor and review your credit score and report, checking for any inaccuracies. If errors are found, take steps to rectify them before applying for a mortgage.

2. Create and maintain a steady work history

Lenders find you more appealing when you can exhibit a consistent employment history and income for a minimum of two years, particularly with the same employer. Make sure to have pay stubs from the 30-day period preceding your mortgage application and W-2s from the previous two years readily available. If you receive bonuses or commissions, documentation to substantiate them will be required

Qualifying can be trickier if you’re self-employed or have income from multiple part-time jobs, but it’s not impossible. If you’re self-employed, you might need to provide business records like P&L statements along with tax returns to complete your application. Contact Sword Mortgage, we’re here to help you no matter what your circumstances may be.

f you’re a recent graduate embarking on your career or returning to work after a break, lenders can typically confirm your employment status if you have a formal job offer that specifies your salary. This also applies if you’re currently employed but have a new job lined up. However, be aware that lenders may raise concerns if you’re transitioning to a completely different industry. Consider this if you’re planning a significant career change.

Having gaps in your work history won’t automatically disqualify you, but the length of those gaps does matter. If you had a relatively short period of unemployment due to illness, for example, you may be able to easily explain the gap to your lender. However, if you’ve been unemployed for six months or more, it can be challenging to obtain approval.

3. Save your money for a down payment

Making a larger down payment can help you secure a lower mortgage rate, especially if you have enough liquid cash to cover 20 percent of the purchase price. While lenders do accept smaller down payments, anything less than 20 percent typically requires private mortgage insurance (PMI), which can cost between 0.58 percent and 1.86 percent of the original loan amount annually. By paying down your mortgage to less than 80 percent of your home’s value, you can eliminate the need for PMI and reduce your monthly payments.

First-time homebuyers who are unable to afford a 20 percent down payment can take advantage of various loans, grants, and programs intended to assist in property acquisition. Eligibility requirements differ across programs and are typically based on factors such as income and whether you are a first-time homebuyer. The mortgage experts at Sword Mortgage will guide you through the entire process, contact us today.

4. Make sure you understand your debt-to-income ratio

Your debt-to-income (DTI) ratio is a comparison between your total monthly debt payments and your gross monthly income. It helps determine how much money you owe relative to what you earn. If you’re unsure how to calculate your DTI ratio, Bankrate provides a helpful calculator for this purpose.

Typically, having a lower DTI ratio makes you more attractive to lenders. It indicates that you can manage a new loan payment without straining your budget. Conversely, a higher DTI means a larger portion of your income is already allocated to existing obligations, making it more challenging to afford additional debt.

5. Search for different mortgage types and terms

If you believe you’ve discovered your forever home and have stable cash flow, contemplate opting for a 15-year fixed-rate mortgage as opposed to the conventional 30-year option. Although your monthly payments may be higher, you’ll be able to pay off your home sooner and save on interest, given that 15-year mortgage rates are typically lower. This option is also suitable if you’re refinancing an existing mortgage.

On the other hand, if interest rates are high, you may want to consider opting for an adjustable-rate mortgage (ARM). These loans typically start with a fixed rate for an initial period (usually five or seven years), which is generally lower compared to a fixed-rate mortgage. Once this period ends, the loan transitions to an adjustable rate, allowing your rate to fluctuate, for the remaining term. In case rates fall or when the time is right, you could refinance an ARM loan into a fixed-rate mortgage.

You determine your eligibility for government-insured or guaranteed loans, such as:

• FHA loans: Insured by the Federal Housing Administration, FHA loans are popular with first-time homebuyers since the minimum credit score and down payment requirements aren’t as high as they are with conventional loans.
• VA loans: If you or your spouse have served in the military, you could consider a VA loan, which is guaranteed by the U.S. Department of Veterans Affairs. In most cases, there’s no down payment necessary, but your lender might require one if you have a lower credit score.
• USDA loans: Created by the U.S. Department of Agriculture, the USDA loan program is designed to help low- and moderate-income people in rural areas buy a home. Again, there’s no down payment needed, but your home must be in an eligible area, and your income cannot exceed a certain amount (based on your location and household size).

6. Understand and consider paying mortgage points

If willing to pay a fee, you have the option to purchase mortgage points, which can result in a lower interest rate. Each point is equivalent to 1 percent of your mortgage amount and typically reduces the interest rate by 0.25 percent. Mortgage points can be considered as a type of prepaid interest

Consider this scenario: You have a $400,000 home loan at a 7 percent interest rate. To secure a lower rate of 6.75 percent, you have the option to purchase a mortgage point for $4,000.

Nevertheless, purchasing mortgage points may not be suitable for everyone. It typically takes approximately five years or longer to recover the initial expenses, making this approach less favorable if you intend to sell within a few years.

7. Shop around for different mortgage lenders

When looking for the best mortgage rate, even for a refinance, it’s important to conduct thorough research to ensure you find the best option for your situation. According to a recent study by Freddie Mac, it is advisable not to settle for the first rate you’re quoted. It’s worth shopping around, as getting a 6 percent rate instead of a 6.5 percent rate on a $300,000, 30-year mortgage could save you nearly $1,200 per year, and almost $6,000 over five years. If you’ve received a quoted rate from another mortgage broker or bank, contact Sword Mortgage to see what we can do for you.

When searching for a mortgage, it’s important to check with your own bank or credit union. However, don’t stop there. Take the extra step to meet with multiple lenders in person and explore online options. As you gather more quotes, you’ll notice that different lenders not only offer varying interest rates but also have different fees, closing costs, and private mortgage insurance premiums. By shopping around, you’ll have the flexibility to choose the offer with the most favorable terms.

8. Lock in your favorite mortgage rate

At times, the closing process can extend over multiple weeks, resulting in rate fluctuations. Once you’ve signed the home purchase agreement and obtained your loan, consider requesting your lender to lock in your rate. Although a fee may be involved, it is often a worthwhile investment, particularly in the current unpredictable, high-rate climate.

Follow mortgage rate trends

Mortgage rates fluctuate regularly due to various factors, such as inflation and economic conditions. While it’s advisable not to attempt market timing, keeping an eye on mortgage rates can provide valuable insights if you’re considering a home purchase in the near future.

Contact Sword Mortgage To Learn More

At Sword Mortgage, we believe that an informed customer is the best kind of customer. Therefore, our loan officers will take the time to fully explain your options and help you understand all aspects of your unique situation before making a decision. Call (770) 757-5750 to speak to a mortgage professional or get started on your loan application process today.