National averages of the lowest rates offered by more than 200 of the country’s top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700-760, and no mortgage points.
Setting a 30-Year Mortgage Rate
Just because advertised mortgage rates are low, doesn’t mean that you’ll receive that from the lender. A good rate will depend on the borrower’s financial profile. Lenders look at factors such as income, credit history, the down payment, and other debts.
In most cases, someone who has a high credit score tends to be offered lower mortgage rates than someone who has a lower credit score or higher monthly debt obligations. Understanding what might affect your individual rate is helpful for borrowers to find the most competitive rate.
Qualifying For Better Mortgage Rates
There are a number of factors that determine who qualifies for the best mortgage rates. Here are several to consider.
Put Down a Higher Down Payment
The higher the down payment, the more likely lenders will approve a lower interest rate. Do your research though, because not all lenders will give you a more attractive rate just because you put 20% down.
Increase Your Credit Score
Mortgage rates are highly influenced by a borrower’s credit score. Lenders typically offer lower interest rates to borrowers with a higher credit score. The more you can work to increase it, the more likely you’ll be offered a lower rate. Some action steps to take include making on-time payments and refraining from applying for additional loans at the same time as your mortgage application.
Lower Your Debt-to-Income (DTI) Ratio
This ratio is calculated by taking the total of your monthly debt payments and dividing it by your gross income. Lenders use this ratio to see whether borrowers can comfortably meet their debt obligations. If this number is 43% or higher, lenders view the borrower as risky, which is reflected in a higher interest rate. You can lower your DTI by either increasing your income or paying off more of your existing debt.
Rates Vary Based on Mortgage Type
There may be different rates depending on the type of mortgage you take out. There are mortgages that vary in the length of term with rates being lower for shorter terms. Adjustable rate mortgages (ARMs) also have different rates with their rates not being fixed for the entire loan term. For instance, ARMs tend to have a lower initial rate compared to fixed-rate loans, but after a predetermined amount of time it’ll go up according to the current market conditions.
Down Payment Requirements
Lenders typically require between a 3% and 20% down payment, with the exception of government backed mortgages. Ones like the FHA loan require a minimum of 3.5%, whereas VA or USDA (rural) loans may not require one at all. The amount required will depend on your lender. In most cases, the higher the down payment, the lower the rate will be.
Understanding Mortgage Points
Mortgage points, or discount points, is a type of prepaid interest borrowers pay when taking out a mortgage to lower their interest rate. This one-time fee costs 1% of your mortgage, or $1,000 for every $100,000. Paying one point will lower the rate by 0.25%, or a quarter of a percent. That means if you got offered an interest rate of 3.5%, paying one mortgage point will lower it to 3.25%.
What Is a 30-Year Mortgage?
Most borrowers choose a 30-year mortgage because it has lower monthly payment compared to other terms, freeing up room for other financial goals. According to Freddie Mac, this is the most popular type of mortgage, with 90% of homeowners opting for a 30-year term.
Who Should Consider a 30-Year Mortgage?
In other words, homeowners can take advantage of better cash flow to pursue other financial goals like saving for retirement or stashing away an emergency fund. Depending on the lender, those who want to make higher monthly payments can do so to in order to pay off the mortgage faster while still allowing the option not to.
Does the Federal Reserve Decide Mortgage Rates?
Are Interest Rate and APR the Same?
How Big of a 30-Year Mortgage Can I Afford?
How We Chose the Best 30-Year Mortgage Rates
In order to assess 30-year mortgage rates, we first needed to create a credit profile. This profile included a credit score ranging from 700 to 760 with a property loan-to-value ratio (LTV) of 80%. With this profile, we averaged the lowest rates offered by more than 200 of the nation’s top lenders. As such, these rates are representative of what real consumers will see when shopping for a mortgage.
Keep in mind that mortgage rates may change daily and this data is intended to be for informational purposes only. A person’s personal credit and income profile will be the deciding factors in what loan rates and terms they are able to get. Loan rates do not include amounts for taxes or insurance premiums and individual lender terms will apply.