Your mortgage rate is one of the most important factors you need to consider when buying a home. A good mortgage rate could be the difference between being able to afford the home of your dreams. So if you receive a good mortgage rate, should you lock it in?
Here’s what you need to know:
What Does It Mean To “Lock” Your Mortgage Rate?
Locking in your mortgage rate means that even if market rates increase between the time of your loan approval and your home closing, your lender will allow you to keep your current lower rate.
Should You Lock Your Mortgage Rate Today?
It’s always a good idea to lock in your mortgage rate since rates tend to change on a daily basis — you never know when they’re going to increase. And even if they decrease, you’re still able to reapply and potentially receive that lower rate.
Right now, however, it’s particularly beneficial to lock in your mortgage rate as soon as possible as rates are expected to increase substantially in 2022. Even in the first week of 2022 alone, interest rates are up. They have risen to over 3.5% for the first time since the start of the pandemic. Experts predict that rates will continue to rise throughout the year, potentially reaching close to 4%.
What Is Considered a “Good” Interest Rate?
It’s hard to say what’s a “good” interest rate since rates change on a daily basis and are largely determined by your personal financial profile. Your interest rate is based on a variety of different factors, including your loan amount, your down payment, your location, and your credit score.
Since it would be nearly impossible to take all of these different factors into consideration when discussing a “good” rate, let’s take one of those factors — credit score. Then, we’ll review what a “good” rate is for different credit score brackets.
For a 30-year fixed-rate loan of $300,000 with a 20% down payment in the state of Florida, here’s what you can expect in terms of an “average” interest rate:
Credit score of 640 to 659: 4.528%
Credit score of 660 to 679: 4.393%
Credit score of 680 to 699: 4.089%
Credit score of 700 to 719: 3.913%
Credit score of 720 to 739: 3.778%
Credit score above 740: 3.721%
How Long Can You Lock an Interest Rate for?
Say what you consider to be a good interest rate, and you want to lock it in. How long can you lock it for? When you get preapproved with your interest rate, most lenders will allow you to lock the rate in for 60 days. This should be able to get you through the closing process.
However, if rates are expected to rise, and you want to lock in your current rate for a longer period of time, some lenders may allow you to extend your rate lock for a price. Generally speaking, you can expect to pay around 0.375% of the loan amount for an additional lock of 15 days.
So if you have a $350,000 loan and want to lock it for an additional 30 days on top of the existing 60 days, you will be required to pay 0.75% of your loan amount or $2,625.
This might seem like a lot. But, if mortgage rates increase over that period of time and you’re able to lock in a lower rate, it can translate into saving thousands of dollars more over the term of your mortgage.
How Can You Get a Better Interest Rate?
Perhaps you got pre-approved but aren’t satisfied with your interest rate. What can you do to get a better interest rate that you can then lock in?
Here are seven tips to consider:
Tip 1: Improve Your Credit Score
One of the most effective ways to get a better interest rate is to improve your credit score. As you now know, your credit score plays a huge role in your interest rate.
The higher your credit score is, the lower your interest rate will be. For the best interest rates, aim for a credit score above 740. So how can you achieve this?
For starters, make sure that you’re making on-time payments on all your credit cards. If possible, pay more than the minimum amount to decrease your debt and lower your credit utilization ratio. Avoid hard inquiries into your credit, taking on new debt, and applying for other loans/credit cards.
Tip 2: Build a Solid Record of Employment
Another way to get a better interest rate is to build a solid record of employment. The better your employment history, the lower your risk to lenders, and the better your interest rate will be. Generally speaking, lenders want to see at least two years of consistent full-time employment.
However, lenders may be willing to make exceptions for recent college graduates, especially in high-paying fields like law and medicine. Additionally, you don’t necessarily need to stay at the same job for two years, but ideally, you should be within the same industry. Some lenders are even willing to accept a formal job offer as employment.
Tip 3: Improve Your Debt-to-Income Ratio (DTI)
When lenders calculate your eligibility for a loan, one of the key metrics they use is your debt-to-income ratio. Also known as your DTI, this calculation compares your gross monthly income to your monthly debts. As a general rule of thumb, lenders want to see a DTI below 36%, with no more than 28% going toward housing-related costs like your mortgage.
So if you’re looking to improve your DTI, you could either reduce your debts or increase your income. Get a new job that pays more or ask for a promotion. Pick up a part-time job or start a new side hustle. Pay off your credit card debt, auto loans, and student loans.
Tip 4: Shop Around With Different Lenders
Many homebuyers make the mistake of getting an interest rate from one lender and simply accepting it instead of shopping around with different lenders to make sure that it’s the best rate. Even if you have an established relationship with your bank, you might be able to get a better interest rate elsewhere.
As a result, experts recommend that you shop around with multiple different lenders, usually between three to five. While this may take some extra time and effort on your part, even a seemingly small difference in your interest rate of one-tenth of one percentage point can translate into lower monthly payments. This can result in paying thousands of dollars less over the term of your loan.
Tip 5: Consider Different Types of Loans
Different types of loans come with different interest rates. So if you’re looking for the lowest possible interest rate, you may want to consider other types of loans. For example, shorter-term loans often come with lower interest rates.
Right now, the average interest rate for a 30-year fixed-rate mortgage is 3.7%, whereas the average interest rate for a 15-year fixed-rate mortgage is 2.9%. While a shorter-term mortgage may translate into higher monthly payments, it also means that you pay less in interest due to a lower interest rate over a shorter period of time.
Tip 6: Purchase Mortgage Points
If you plan on staying in your home for an extended period of time, you may want to consider purchasing mortgage points to lower your interest rate. Some lenders allow you to purchase mortgage “points” at the cost of 1% of the loan amount per every 0.25% decrease in interest rate.
So if you received an interest rate of 3.5% for a 30-year fixed-rate mortgage of $350,000, you could pay $7,000 to receive a 0.5% reduction in your interest rate to 3.0%. Before you pay mortgage points, it’s important to calculate whether or not your potential long-term savings are worth paying the extra money upfront.
Tip 7: Put More Money Down
The last thing you can do to potentially receive a lower interest rate is to put more money down. Again, your interest rate is a reflection of the risk you present to lenders. Higher risk translates into higher interest rates. And lenders consider lower down payment amounts to be higher risk since you’re not as invested in the home purchase.
So if you’re looking for the best interest rate possible, you should try putting down 20% of the home’s purchase price. Down payments below 20% are often subject to higher interest rates.
Lock In a Low Interest Rate
If you’re looking to lock in low interest rates before they increase even further, then apply for a loan with Vaster today.
For any questions about our loan products, you can reach out to our mortgage experts. For more insight into mortgage rates and other home buying tips, check out our blog.