Bulletin
Investor Alert

New York Markets Close in:

May 20, 2022, 10:22 a.m. EDT

As mortgage rates tick upwards, 8 secrets to getting the lowest mortgage rate possible for you

Alisa Wolfson

MarketWatch Picks has highlighted these products and services because we think readers will find them useful; the MarketWatch News staff is not involved in creating this content. Links in this content may result in us earning a commission, but our recommendations are independent of any compensation that we may receive. Learn more

At this time last year, 30-year mortgage rates sat at a little over 3%, but now, they’re over 5%. And some pros say we may see more interest rate increases this year ( see the lowest rates you can qualify for here ), which makes locking in the lowest rate on a new loan appealing. So we asked experts to share what you need to do to make sure you get the best mortgage rates.

1. Raise your credit score as much as possible

Typically, the higher your credit score, the better your interest rate. According to data from LendingTree, borrowers with credit scores of 760 or higher were offered an average APR that was 16 basis points lower than the average rate for borrowers with scores between 680 and 719. A basis point is equivalent to 0.01% and therefore one hundred basis points equals 1%.

To raise a credit score, check your credit report for errors (and dispute them), pay bills on time and reduce the amount of debt you owe. Also, it’s important that you don’t apply for too many new credit lines of loans when trying to get a mortgage as this can ding your score.

2. Get your finances in order

A lender will want to thoroughly assess how likely it is that you will repay the loan, and to figure that out, they go beyond just your credit score and take a deep dive into your finances. This means you will want to pay down major debts, and get a good understanding of your entire financial picture from your income. Understand your debt-to-income ratio (a DTI is the total amount of your monthly debt divided by your gross monthly income) and know that lenders typically want one that is 43% or less of your assets.  To show steady income, begin by building a record of employment and be prepared to show pay stubs from at least the 30-day period prior to when you apply as well as W-2s from the past two years. Self-employed individuals or those with multiple gigs may need to submit profit-and-loss statements in addition to tax returns to show a stable work history. 

This guide goes into detail on what mortgage lenders look for when it comes to your credit score and finances.

3. Save big for your down payment

Making a larger down payment can afford better rates because the lender is assuming less risk. And putting more down likely means you won’t have to pay private mortgage insurance which can range from 0.05% to 1% of the original loan amount annually if you put less than 20% down. 

4. Get quotes from 3-5 lenders

Greg McBride, chief financial analyst at Bankrate, recommends comparing three to five lenders to see who is offering the best interest rates ( see the lowest rates you can qualify for here ) and other terms like points, fees and more. “Be sure to look at closing costs, fees, points and tax credits. This can get a bit overwhelming, so if you have a financial planner, be sure to include them in the discussion,” says Jen Grant, certified financial planner at Perryman Financial Advisory. 

“Gather all your rate quotes on the same day. Rates fluctuate daily and lenders should be able to give you their best rate out of the gate,” says Denny Ceizyk, senior staff writer at LendingTree. 

5. Lock in the rate

Locking in your mortgage rate early on means your lender can’t raise your interest rate between the time you apply for a loan and the time you’re approved. That way, should the market fluctuate during the application process, you’ll be spared from paying higher interest rates if they go up.

6. Weigh the pros and cons of buying points

Discount points are fees borrowers pay upfront to reduce the interest rate on their mortgage. Typically, one point costs 1% of your mortgage amount, and each point lowers the loan’s interest rate by one-eighth to one-quarter of a percent. “The lowest rates quoted often come with mortgage points, a minimum loan amount requirement or a certain amount of equity,” says Ceizyk.  But note that buying discount points isn’t always worth it because your breakeven point on them may be years down the road; if you don’t plan on staying in your house very long, think twice about this.

7. Consider first-time buyer programs

With aid like down payment assistance, funds available for repairs and remodeling, no-interest second loans and reduced interest rates, first-time homebuyer programs are designed to lure new residents to specific areas. States like California, Florida, Illinois and New York offer programs to help alleviate costs associated with taking out a new mortgage and some states even offer tax credits that can be used on your federal tax return.  FHA loans, USDA loans and VA loans are among the most common loan types for buyers with lower credit and smaller down payments. 

8. Apply for a shorter loan term

Shorter loan terms, like 15-year loans, can offer better rates than longer term, 30-year loans. “Lenders price loans based on risk. If you can pay your loan off faster at a higher payment, lenders reward you with a lower payment because as your balance is paid down, there’s less risk you’ll default,” Ceizyk says. 

Link to MarketWatch's Slice.