With all the hype about historically low interest rates, you may decide that now is the right time to start searching for homes for sale in Charlotte, NC, or Orlando, FL. And that makes sense: the lower your interest rate on your mortgage, the more money you’ll save over the life of your loan. Just a one-point difference can mean saving thousands of dollars over 15 or 30 years. So you may be shocked if you prequalify for a mortgage and find that your quoted rate is much higher than what the lender advertised as possible. The reality is that the lowest advertised interest rate may not be anywhere close to the rate for which you can qualify.
The interest rate you’re offered may be higher than the advertised rate for a variety of reasons, from your credit score to the types of properties you’re hoping to buy. Consider the following scenarios, then find out how to score the best interest rate advertised.
1. Your credit score is less than excellent
Unless your credit score is near perfect, a low (or even good) score will be the biggest reason you aren’t offered the lowest advertised interest rate. While those stellar rates are available, lenders usually don’t quote them to borrowers with credit scores below the 800s. Other aspects of your financial life, such as a high debt-to-income ratio or a shaky employment history with inconsistent income, can prevent you from getting the advertised interest rate. Ultimately, anything that makes a lender feel you’re a higher risk will result in a higher rate.
2. You’re shopping for a vacation home
Mortgage loans aren’t created equal, and it’s not just your information that affects the rate the lender quotes. The property you want to purchase can also impact the rate and the terms of your loan. If you’re looking to buy a condo, for example, your lender may quote you a higher rate than if you were looking to borrow money for a single-family property. The same goes for vacation homes. In these cases, your quoted rate probably will be much higher than the advertised interest rate, even if your credit score is great.
3. Your lender doesn’t want to get competitive
Did you receive a quote for an interest rate from a large, corporate bank and get a little bit of sticker shock when the numbers came back much higher than you expected? Remember that lenders make profits from the interest they charge on money they let people borrow. If, for whatever reason, an institution or lender doesn’t feel the need to offer competitive rates, your quote may come back with a much higher number than you believe you deserve. Lots of external factors influence a lender’s decision, such as the economy, current marketplace, and the amount of competition in the home loan space.
How can you get the best interest rate on a mortgage?
Knowing why you didn’t get the best interest rate advertised doesn’t make it any less frustrating when the rate you see is much higher than you expected. But there is good news: You can take action to get a better rate when you apply for a loan if the interest rate you were quoted isn’t as good as you thought it would (or should) be. While some factors are outside your control, focus on what you can influence, like your credit score and the amount of debt you carry. You can work to boost your score before you apply for a mortgage. Be sure to consistently make payments on credit card balances and bills in full and on time. Don’t open new lines of credit right before you apply for a mortgage, and don’t go crazy closing old accounts either.
Finally, repaying current debts before taking on more debt to purchase a home is a savvy financial decision that will benefit you — both when you apply for a loan and after you get it (when you’ll need to manage that new monthly mortgage payment). If you currently carry debt, establish a repayment plan you can stick with and work aggressively to pay down your balances. Building your credit and repaying your debt can take time — and that’s OK. You may need to push out your timeline for applying for a mortgage and buying a house a little more, but it’s well worth doing to get the absolute best interest rate for which you can qualify.
