Darin and Christina Cunningham | Re/Max Elite
278 Franklin Road Suite 190 | Brentwood, TN 37027
Office: 615.661.4400 | Fax: 615.661.4115
Christina: 615.394.4168 | Darin: 615.456.4086

How to Get the Best Mortgage Interest Rate

The average house costs above $260,000 and most people don’t have that amount of money in their savings account. This means most people borrow most of the amount from a lender and pay it back over time.

Most people prefer getting a mortgage to help finance their dream house. However, getting a good interest rate on a mortgage can be a bit complicated. It involves more than just shopping for the best mortgage rate which is important. The interest rate affects the long term cost of the mortgage and getting the lowest rate can make the loan affordable.

The mortgage rate, also known as the interest rate, is the interest to be charged on loan and it is calculated as a percentage of the total loan. A number of factors determine if you are going to get a mortgage and also what interest you will pay.

Here are some of the tips you can use to get a good interest rate on your mortgage:

Great credit score

Lenders today base your mortgage lending on tiered pricing. This means the rates are adjusted based on different criteria. One of these criteria is your credit score. It determines whether you qualify for a loan and the interest rate you will pay. A higher the credit score generally helps you get a lower interest rate on your mortgage.

Borrowers with a credit score of 760 or above get the best mortgage rates. As your FICO credit score goes down, the interest rate goes up.

Income/Employment stability

Lenders prefer people who have proven steady employment or income for the past two years at least. If you keep on switching jobs regularly, you might not be a preferred candidate. You may be seen as a high risk individual, and your mortgage rate may go up.

Being on the same job for the past two years is good or if you have made a job change to a high paying position it makes you look like a better prospect.

Debt to income ratio

Debt to income ratio (DTI) is the comparison between your debts and how well you repay them. It is basically how much debt you have compared to your gross income. In this calculation, two formulas are evaluated. The front end ratio and the back-end ratio. The housing ratio (front end ratio) combines all your housing costs per month and divides them by your gross monthly income. The total debt (back-end ratio) is a comparison between the amount of money a person earns (measured in gross monthly income), and the amount he or she spends on all recurring monthly debts including the housing payment.

The higher your DTI ratio, the more likely you are to default on your mortgage and if it is too high lenders might pass you by. Lenders prefer candidates with a front end ratio not higher than 28% and a backend ratio of 36% max.

Down payment

The general rule is you need at least 20% of the purchase price as your down payment to get the best mortgage rate. You can look at it this way, a loan with a small down payment is seen as a higher risk than the one with a higher down payment thus causing a higher interest rate.

Leave a Reply