A mortgage is the largest financial obligation most Americans will ever take on. Unlike a typical car loan, securing a lower interest rate on a home loan can make a huge difference over time. For example, on a $250,000 mortgage, an additional one-half of a percentage point adds $23,427 in extra interest paid over a 30-year loan.
Although it’s easier than ever to shop online for a mortgage, with new products and services promising speedy results, it’s not always the best way to go, especially if you have less than perfect credit or nonstandard income sources. That’s where mortgage brokers can offer personalized service by working with multiple lenders to find the best loan options for you — sometimes at better interest rates than if you applied with the lenders on your own.
Three experienced mortgage brokers shared with NerdWallet their suggestions on how to get the best interest rate and a mortgage that fits your needs.
Tidy up your personal finances
Getting your financial house in order before applying for a mortgage will help you get a lower interest rate. One of the best ways to do this is to boost your credit score, says Joe Phalen, senior vice president and divisional sales manager at Guaranteed Rate in Chicago. This means paying bills on time, avoiding new debts and checking your credit report to correct any errors, says Phalen, who has nearly 25 years of experience in the mortgage industry.
When determining how much you can borrow, mortgage lenders look at your debt-to-income ratio (using your gross, or pretax, income). Phalen encourages consumers to reduce their debts, such as credit cards or student loans, so they can afford more home. “The rule of thumb is borrowers must have a debt-to-income ratio of 43% or less to get a mortgage,” he says.
It’s also important that you understand your qualifications and how they will affect mortgage pricing and availability, says Dane Moler, division manager at Primary Residential Mortgage in San Francisco. These qualifications include your credit score, income, available assets and job history, he says.
“If you have very strong and very basic qualifications, you can shop online for the low-price leader and generally succeed,” he says. “However, if your qualifications are complicated or borderline, you will have better success working with a lender who will give you better, more personal service.”
Make the right choice on rate type
One crucial decision is whether to choose a fixed-rate or adjustable-rate loan. Fixed-rate loans have the same interest for the entire term. Adjustable-rate mortgages start with a fixed rate period that’s typically lower — but after that set period, the rate can vary based on the market, so it may go up or down.
Both types of mortgages have pros and cons. “The initial low costs of ARMs can be appealing, but they have a degree of uncertainty,” Phalen says. “Fixed-rate mortgages can have more rate security but can be more expensive.”
The amount of time you plan to stay in your home is a key way to determine the best type of mortgage, says Jay Voorhees, founder and owner of JVM Lending in Walnut Creek, California. “If a buyer does not intend to move or relocate within seven years, a 30-year fixed-rate loan is usually recommended to be safe,” especially when fixed rates are very low, as they are now, says Voorhees, who has 22 years of mortgage industry experience.
Voorhees points out that currently there’s not much difference between 30-year fixed and adjustable-rate mortgages. “In these situations, it makes little sense to pursue an ARM in most cases, because borrowers take on more risk for only a marginal improvement in rate,” he says.
But Moler says that in the past 10 years, an A-paper ARM — one offered to the most qualified borrowers — has been the better financial decision. “Most people assume rates will rise when a loan starts adjusting, but in fact they have done the exact opposite, and consumers have been paying in the 2%s-3%s after their adjustable period begins,” he says. However, it’s impossible to tell what will happen over the next decade. For that reason, consumers should consider their flexibility to handle higher payments in case rates go up, Moler says.
Choose your loan term wisely
Another major mortgage decision is the loan term. The two most common options for fixed-rate mortgages are 15-year and 30-year loans. The shorter the loan, the lower your interest rate — but the higher the monthly payment, since you’re paying off the loan faster.
Voorhees typically recommends that consumers go with the 30-year option, since the lower payment is more convenient when their cash flow is tighter. “And when cash flow is not tight, we recommend that borrowers invest the savings from the lower payment in assets other than real estate in order to diversify themselves,” he says.
Phalen recommends that homebuyers take a 15-year mortgage if they have substantial savings or if they plan to retire in less than 15 years and can pay off the mortgage quickly.
If you’re unsure, Moler offers a reminder that you can always pay extra on a 30-year mortgage, but you can’t pay less than the minimum due on the 15-year mortgage. While a 15-year mortgage may offer long-term savings, “it’s important to weigh that against the loss in flexibility and make the decision from there,” he says.
Selecting the right mortgage is key to getting the optimal interest rate. An experienced mortgage broker can help you understand the risks and rewards of mortgage types and terms, helping you select the loan that’s safest and most affordable for you.