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How to Get the Best Interest Rate For Your Mortgage Loan

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There are many factors considered when a lender determines your mortgage interest rate.

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The amount you borrow to purchase your home can raise your mortgage interest rate if the amount of your mortgage exceeds the conforming loan limits established by the mortgage industry. This conforming loan limit is set at the beginning of every year. Mortgage loans with shorter terms, like a 20 year or 15 year mortgage, can save thousand of dollars in interest payments during the term of the loan; however, your monthly payments will be much higher. An adjustable rate mortgage (ARM) will start you off with a lower interest rate next to a fixed interest rate mortgage loan; however your payments might get higher due to interest rate hikes, like when the Fed raises short term interest rates waging its losing battle with inflation.

Increasing your down payment, for example putting more than 20 percent down, will get you the best possible interest rate. If you only put 5 percent down, or even less, you will pay a higher interest rate for your mortgage since you have less equity in your home for collateral on the mortgage loan. If you have the cash on hand and want a lower monthly payment, you can pre-pay points on your mortgage to secure a lower interest rate. This is a simple concept actually; In exchange for paying points on the mortgage loan upfront, your mortgage lender will lower your interest rate. This will lower your monthly payment on your mortgage. Be careful with closing costs; these are fees paid by the mortgage lender, and if you don’t want to pay all of them, expect to pay a higher interest rate which is more money in the lender’s pocket over the term of the mortgage loan.

Your credit score and debt to income ratio will also affect your mortgage interest rate. If you have a good credit score and your income surpasses your debt, you will qualify for a lower interest rate. Conversely, if you are barely able to meet your bills every month, even with a good credit score, you are going to get a higher interest rate on your mortgage loan. To learn more about securing the best possible interest rate when refinancing a mortgage, sign up for our free guide: “Five Things You Need to Know When Refinancing a Mortgage Loan.”

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