Purchasing a home or refinancing can easily be the largest financial transaction of your life. So, take some time and be prepared. Here are the top 5 things to consider to lock in the lowest mortgage rates.
1. Property type = Single family home
Are you financing a single family home or a condo? Single family homes always have lower rates since there are additional risks involved with condominiums (i.e. disputes with the condo association, pending lawsuits, complicated by-laws, etc.)
2. Loan term = 15 or 20 years
The loans with the shortest terms have the best rates. So, if you want to get the lowest mortgage rate, a 10 or 15 year term is the way to go. If you cannot afford a lower term payment, then shoot for a 20 year loan instead of a 30. Even though you are paying more every month, most of that will go towards principal and you will pay off your loan a lot faster and save thousands of dollars in interest.
3. Credit score = 740+
Needless to say, the higher scores get the best rates. The average credit score in the United States is about 720, but scores 740+ will attract the best deals. It will take at least 30-45 days for your score to change, so make sure you pay down credit cards and take care of any delinquent accounts well in advance of starting your mortgage application.
4. Escrows for taxes and insurance
Loans without escrows are considered more risky and therefore have higher rates. Even if you have never missed a tax payment, applicants who do not escrow will get a small bump in rate. Similarly, property insurance premiums should be in escrow as well so the lender is assured your home stays covered.
5. 21 day rate lock
Many lenders offer rate locks that are 30-60 days long. Even thought that sounds tempting for a buyer, if you really want the best deal the lock period should be as short as possible. Locking in for longer periods of time is more risky for lenders and that will be priced into the rate. You can save hundreds of dollars by waiting to lock until a couple of weeks before closing.