Taking out a mortgage for a home purchase is one of the biggest financial transactions for many of us.
With skyrocketing interest rates in 2022 and into 2023, it has been much more challenging for homebuyers to purchase a home they can afford.
Fortunately, there are steps you can do to improve your chances of getting the best rates.
We’ll explain how mortgage rates work and share our best advice on getting the lowest possible mortgage rates in Texas, whether you’re a first-time home shopper, finding a second home, or planning to refinance.
Understanding Mortgage Rates and How They Work
A mortgage rate reflects the amount of money you pay your lender in addition to the amount you borrowed (the principal).
- Banks and lenders typically finance 80% of the home cost. Then, you pay back what you owe with interest over a specific term.
- Your monthly mortgage payment consists of the principal, interest, taxes, and insurance.
There are two basic loan types.
With this mortgage type, the interest rate doesn’t change throughout your loan term. That means you have a fixed monthly payment.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate loan starts with a lower introductory rate, usually within 5, 7, or 10 years, to entice home shoppers. The rate will change after that period, depending on the market conditions.
Interest rates can differ significantly depending on these factors:
- Overall market conditions, including inflation, unemployment rate, stock and bond markets, and housing market
- Type, value, and location of the home. For example, a single-family unit will have a lower rate than a multi-unit complex.
- Loan type, amount, and term
Your unique financial situation also matters, including your credit history, debt-to-income ratio, and down payment.
How Interest Rates Affect Mortgage Costs
Mortgage interest rates directly impact the cost of a home purchase.
- The higher your mortgage rate, the more expensive your monthly payments will be.
- It leads to a higher total cost over the life of a loan.
- Reducing a mortgage rate by as little as 0.25% translates into substantial savings.
Check out this chart demonstrating different monthly payments (without property taxes and insurance) for a $300,000 house loan payable for 30 years.
Total Cost (30-Year Fixed)
10 Ways to Get the Best Mortgage Rates
The good news is there are cost-saving steps to get the lowest possible rates and reduce your monthly payments.
1. Review Your Credit Report
Monitoring your credit report allows you to understand where you stand financially. It will help you determine your next steps to increase your trustworthiness meter in the eyes of lenders.
- Contact the credit bureau to correct any error on your credit report and improve your credit history.
2. Increase Your Credit Score
A 740 credit score or higher helps you qualify for the best rates.
A strong credit history informs lenders that you’re a responsible borrower. Your past financial behavior helps lenders evaluate whether you’re a low-risk borrower capable of repaying your debt.
Do these financial habits to build a solid credit history and a high credit score:
- Avoid maxing out credit cards.
- Be on time when paying bills, including rent, utilities, and insurance.
- Maintain a credit card balance below 30% of your credit limit.
- Avoid co-signing on leases and credit lines.
- Do not close old credit accounts.
3. Pay Off Debt to Decrease Your Debt-to-Income Ratio
Lenders will likely think twice about approving your loan if you have huge debts, particularly revolving credit card debts.
Find a good balance between saving up for a down payment and paying down debts.
4. Compare Different Lenders
Request a custom estimate from multiple lenders to get a clear idea of possible mortgage rates.
5. Put Down a Bigger Down Payment
A higher down payment immediately increases equity in your home. It improves your chances of getting a lower interest rate as it decreases the risk for the lender.
A smaller down payment below 20% will drive up your monthly payments, as you have to pay for private mortgage insurance.
Nonetheless, ensure you have enough emergency funds to cover three months of expenses to prepare for the unexpected.
6. Choose a Shorter Term
The shorter the length of your loan, the less you’ll pay overall for your home purchase.
Your monthly payments will be lower as lenders typically offer lower rates when you commit to paying off your loan in a shorter period.
However, keep in mind that shorter loans involve bigger monthly payments.
7. Accumulate Assets
Assets such as mutual funds, bonds, stocks, and property sale proceeds increase your ability to repay your loan, thus lowering your interest rate.
8. Pick the Right Timing
If interest rates are steadily increasing, it may be a good idea to wait for overall market conditions to improve.
However, you could also buy a home now and refinance in the future when there are opportunities for lower rates.
Talk to a financial advisor or mortgage broker about your options.
9. Buy Prepaid Mortgage Points
Prepaying interest at closing through mortgage points (or discount points) can help lower your mortgage rate.
This could be a wise, money-saving move if you plan to stay in your home for many years.
10. Choose a Trusted Mortgage Broker
A mortgage broker is a licensed financial service provider who can help you find the right lender that matches your financial situation.
- They will find the best mortgage program and interest rate that fit your needs.
- They work with multiple banks and lenders to offer suitable lending options to borrowers.
- They will share valuable knowledge about different loan types.
Your mortgage broker will do the legwork and save you the hassle of comparing different lenders.
- A higher mortgage rate means higher monthly payments.
- It helps to be financially responsible, save up for a bigger down payment, and compare different lenders to get the best rates possible.
Need assistance getting a mortgage? We’re ready to help!
We will shop for the best rates and talk to financial institutions on your behalf, so you get the best pricing on your mortgage.
Contact us today. One of our friendly mortgage experts will help ease homeownership for you.