Step 1: Do your homework
What loan term do you want?
- 30 year fixed - great if you plan on staying in your home for a long time
- 15 year fixed – great way to save thousands in interest payments
- 5/1 ARM – good option if you planning on upgrading or downsizing in the future
Talk to your mortgage lenders about the different loan programs they offer.
How’s your credit?
Your interest rate will be determined in large part by your credit rating. You need to get your credit scores from all 3 credit bureaus before you apply.
Can you document your income?
Increased lender requirements mean you must be able to fully document your income with pay stubs and tax returns in order to get the lowest rate or in some cases even qualify.
What is your approximate home value?
For the best rate, your Loan to Value Ratio (LTV) should be below 80%. You can calculate your LTV by dividing your total loans (first mortgage plus any home equity loans) by your estimated home value. Some lenders will lend on LTVs of 90% - 100% depending on whether it is a conventional (< $429,00 loan balance) or an VA or FHA loan. Be aware that appraisers are being extremely conservative with the valuations since the housing market crashed in 2007.
Do you want to take cash out?
If you have enough equity then paying down some of your higher interest rate debt such as credit card debt may be an option. Do not be too aggressive with this strategy. The equity in your home may be one of your main sources of retirement savings. You should also have at least 3 month’s salary in an easy to get to bank account in case of emergency. You will not be able to get a home equity loan or cash out if you are out of work.
Start getting your documentation together. At least 2 recent paystubs for anyone on the loan, tax returns for the past 2 years and bank statements from the last 2 months.
Step 2: Shop around for the best rate
Get custom rate quotes from up to 3 different lenders. Custom rate quotes mean they have your credit score and estimated your LTV so the rate they give you is not just any rate but one you can actually qualify for.
Compare interest rates, payment amount, fees and APR – which is your annual percentage rate when all fees, costs and payments are added up.
Choose a lender based on the best APR, amount of documentation and how fast they can get the loan done.
Ask the lender you choose for a good faith estimate. This is the lender's commitment, in writing, to what you will be paying for the loan, what interest rate you will receive, and what your final payment will be.
Schedule an appraisal with the lender.
Consider locking your rate in if you see that rates are beginning to rise. Ask your lender about this. Rate locks are time sensitive and you want to be sure you can get the loan done before the lock expires. You can get weekly rate updates from Freddie Mac, a Government Services Enterprise. Rate updates are released every Thursday and since they are rates as reported by lenders to Freddie Mac, they are very reliable.