Especially in a low-rate environment where mortgage rates are consistently low, if not falling, borrowers pin their hopes on qualifying for the best mortgage rates available, but become easily frustrated when they realize they cannot qualify for the lowest rates available.
Often, it's a borrower's own financial profile that prevents them from locking in the best mortgage rates possible. Here are six steps you can take to qualify for the best mortgage rates:
No. 1: Raise your credit score. Conventional lenders charge a higher interest rate for lower credit scores.
"Depending on market pricing, you can shave one-eighth to one-quarter percent off your interest rate if you can get your credit score above 740," says Amy Tierce, regional vice president for Fairway Independent Mortgage in Needham, Mass. "Most lenders will raise your interest rate incrementally if your score is below 740, 720, 680 and 660."
Tierce recommends working with a lender who can use a credit score simulator to advise you on what steps to take to improve your score, although she says this can take 30 to 90 days or longer depending on your circumstances.
No. 2: Make a bigger down payment. The larger your down payment, the deeper your initial equity stake, thus the less risk you pose to the lender.
For example, says Tierce, if you make a 20 percent down payment on a $300,000 loan your interest rate would be 3.75 percent. If you made a 25 percent down payment your rate would be 3.625, and if put 40 percent down your rate would be 3.50 percent (these rates prices were quoted Feb. 5, 2013, assuming excellent credit.)
"Be reasonable, though, because making a 40 percent down payment of $120,000 may not be the best use of your money to just reduce your mortgage rate by one-quarter percent," says Tierce. "Some people are better off keeping their cash in savings."
No. 3: Pay points. You can also use cash to pay discount points to reduce your mortgage rate. Points are considered a prepayment of interest, and each point is equal to one percent of the loan amount.
"Depending on the lender, paying one point will reduce your mortgage rate by one-quarter percent," says Mark Richards, a senior mortgage loan officer for TD Bank in Washington, D.C. "On a $200,000 loan, you'd pay $4,000 to bring down your rate 0.5 percent. You'd only save around $4,000 in the first 10 to11 years, but you'd save $40,000 over the life of the loan with that lower rate."
No. 4: Shorten your loan term. While the spread between mortgage rates for loan terms vary, Tierce says that generally, 20-year fixed mortgage rates are about one-eighth percent lower than interest rates for a 30-year fixed, and 15-year fixed-rate loans are one-quarter to three-eighths percent lower than 30-year fixed-rate loans.
"You can save thousands on interest payments with a shorter loan term, although you have to make sure you can handle the higher payments," says Mark Fowler, chief revenue officer and vice president of production at the Residential Finance Corp. in Charlotte, N.C.
A Hybrid ARM, with a lower fixed-rate interest rate for five or seven years can be as much as a full percentage point lower than a 30-year fixed-rate loan.
"If you know you are moving or know you'll be increasing your income before the interest rate adjusts, an ARM can be a good financial tool," says Tierce. "Just don't use it to get into a more expensive home than you can afford."
No. 5: Shorten your loan lock-in period. "The longer the lock-in, the higher your interest rate," says Richards. "If you lock in your rate for 60 days, it will be one-eighth percent higher than a 30-day lock, and if you choose a 90-day lock, it will usually be one-third percent higher."
Richards says that most purchase loans take 30 days to close, while a refinance may need 45 to 60 days. If you choose to wait to lock in your rate, you're gambling that mortgage rates won't rise, says Tierce.
No. 6: Buy a single-family home. Condominiums are considered a riskier investment because they dropped in value more than other types of homes during the housing crisis, says Tierce, so mortgage rates are usually one-eighth percent higher than for a single-family home. However, if you make a larger down payment of at least 25 percent, that interest rate add-on will not be charged.
If you can't follow each of these six steps, you may still be able to achieve the best mortgage rates by improving in a few areas. As Richards explains, lenders consider multiple factors to determine your mortgage rate.
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Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time", has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.