1.Assess your financial strengths and weaknesses.

2.Choose a standard product that fits a realistic time horizon.

3.Get a quote from more than one lender, to make sure that the Rate is competitive.

Best Mortgage Rate Strategy #1: Assess your strengths and weaknesses

For the purpose of obtaining a Mortgage, your financial position consists of three components:

1.Your income, which gives you the ability to make your monthly payments

2.Your savings, which allow you to make a down payment, cover closing costs, and keep some cash reserves to cover unexpected expenses

3.Your management of other credit, such as car loans and credit card balances

Your strengths and weaknesses can be gauged by looking at these components relative to one another.

Savings relative to income

The first relationship to look at as is your savings relative to your income. Add up all of the savings that you have available for a down payment, including savings accounts, mutual fund shares that you plan to redeem, and gifts from relatives that will go toward a down payment.

If your savings amount to less than 25 percent of your income, then your savings are relatively deficient. For the maximum purchasing power, you probably will require a loan with a down payment of less than 5 percent, such as those offered by the Veterans Administration (VA) or the Federal Housing Authority (FHA). Alternatively, if you believe that you have the capacity to add to your savings in the next year or two, then it may pay to wait before buying a home.

If your savings amount to more than 25 percent of your income but less than 75 percent of your income, then your savings are adequate. You probably can put down at least 5 percent of the purchase price of your home. However, for the maximum purchasing power, you probably will require a loan with Private Mortgage Insurance (PMI), which adds to the cost of a mortgage.

If your savings amount to more than 75 percent of your income, then you probably can make a down payment of 20 percent of the purchase price of your home. This will allow you to avoid paying the cost of PMI.

Debt relative to income

One way to assess your management of credit is to look at the ratio of debt payments to income. Debt payments consist of car payments, student loan payments, alimony, required payments on installment loans, required payments on credit cards where you are paying interest, and other obligations. They do not include rent, utility bills, the mortgage payment on a house that you are selling to buy a new home, or payments on credit card balances where you pay at the end of the month without owing interest.

If your monthly debt payments are more than 10 percent of your income, then debt is an area of concern. If along with this high debt ratio you have a history of sometimes missing your monthly payments, then you may have difficulty qualifying for the best mortgage rates. Even if your payment history is clean, you might benefit by paying down some of your debts before you take on the additional burden of a mortgage.

If your monthly debt payments are between 5 and 10 percent of your income, then this should not prevent you from obtaining a standard mortgage. However, you probably could benefit from reducing your debt payments, and you might be able to reduce your interest costs by taking out a larger mortgage and paying off some of your other debt.

If your monthly payments are less than 5 percent of your income, then your debts should not cause a problem with respect to obtaining a mortgage.

 Best Mortgage Rate Strategy #2: Choose a standard product to fit your time horizon

It is important to realize that the 30-year fixed-rate mortgage is not the only standard mortgage product. You can obtain quotes from many different lenders on 5-year and 7-year balloons, 1-year, 3-year, and 5-year adjustable rate mortgages (ARMs) tied to the one-year Treasury index, and 6-month and one-year ARMs tied to the COFI index (these latter loans are more prevalent in California than elsewhere).

Your time horizon should be a major factor in choosing a loan product. The 30-year fixed-rate mortgage rate tends to be higher than the rate on nearly all other mortgage products. Moreover, the vast majority of people who take out 30-year loans pay them off in less than 30 years, either because they refinance or change houses. Thus,

• possibility that you will change employers or be transferred by your current employer
• possibility that your housing needs will change–because of children, for example
• possibility that your income will increase sharply in a few years

The importance of time horizon (along with interest rate scenarios) is best illustrated by the calculator we call The Intelligent Mortgage Agent. By using that calculator, you can identify products that might be better suited to your likely time horizon.

 Best Mortgage Rate Strategy #3: Get a Competitive Rate Quote

If you are taking a standard mortgage product, then a little bit of research can help ensure that you get a reasonable deal. I am not suggesting that it is worth going to great lengths to try to shave the last 1/8 point off your interest rate. But before you go with one lender, at least find out what some other lenders are charging on comparable loans.

One difficulty that people have in comparing competing quotes is making the trade-off between up-front points and interest rates. A reasonable rule of thumb is to say that one point up front is worth about 1/4 point over time. Using this rule, for example, an 8 percent mortgage with one point costs about the same as an 8-1/4 percent mortgage with no points. The 4-to-1 rule is not a precise mathematical law, but it is close enough to give you reasonable comparisons.

Another roadblock to making comparisons consists of how different lenders handle fees. It is important to get a complete list of the fees that lenders charge, in addition to the basic quote of interest rate and points.

One advantage of shopping for a mortgage on the Internet is that online lenders realize that they are in a competitive environment so get them to compete for your business.