When you are looking to buy a home, one of the most important things to consider is the interest rate you get on your mortgage. Because mortgages are such long-term loans, even a tiny increase in the interest rate can mean you pay thousands of dollars more over the life of the loan.
To ensure you don’t pay too much for your mortgage, here are five tips for getting a better interest rate and making a better tomorrow for yourself as a homeowner.
Shop Around
You would think all lenders have the same standards and offer the same rates to borrowers with similar backgrounds, but that’s not always the case. Different lenders have different underwriting standards, so it pays to shop around for a mortgage. Talk to at least three different lenders, and ensure you talk to at least one online lender and one brick-and-mortar bank. Online lenders often have lower rates because they have lower overhead, but your local bank might offer mortgage deals to existing customers that could get you a lower rate.
Look for Programs
You often can get a better mortgage rate through government programs aimed at boosting homeownership. For example, if you are a veteran of the military, you may be able to qualify for a VA loan. First-time buyers and those with lower incomes may be able to qualify for loans backed by the Federal Housing Administration or state programs. If you live in a rural area, you may be able to get a loan backed by the U.S. Department of Agriculture. These loan programs often offer better deals than conventional loans, including lower interest rates.
Get a Shorter Loan Term
You can get a lower interest rate by giving yourself a shorter payback period. On average, rates on 15-year mortgages are about half a percentage point lower than rates on a 30-year loan. That means a tremendous amount of savings on finance charges over the life of your loan.
The downside to having a shorter payback period is that your monthly payment is much higher. That puts this strategy out of reach for many people because they could not realistically afford the monthly payment on a 15-year loan. But if you can afford the payment, it’s a great way to get a lower rate. Plus, you will pay off your house a lot faster.
Boost your Credit Score
The most important factor in what kind of interest rate you get is your credit score. The low mortgage rates you see advertised are only for people with the best credit scores, usually anywhere from 720-760 on the FICO scale, depending on the lender. If you do not have a credit score that high, you might want to wait a few months and try to raise it before applying for a mortgage.
In the meantime, seek some help to boost your score. A credit repair company may be able to help you improve your credit score. Paying down debt, bringing past-due accounts current, avoiding applying for new credit, and correcting errors on your credit report can help bring up your score and ensure you get a better interest rate.
Get an Adjustable Rate
Adjustable-rate mortgages carry lower interest rates because there is less long-term risk to lenders. For example, if you get a 30-year mortgage at 4 percent and in 10 years, prevailing rates have risen to 6 percent, your lender or the investor that bought the loan is making less money. With an adjustable-rate loan, you get a lower upfront rate because lenders and investors can make up the rate difference later. The drawback to an adjustable-rate loan is that you eventually have to refinance or you run the risk of your rate going way up, although it also could go down.
Using these tips to get the lowest mortgage rate possible will ensure you save money on finance costs over the life of your loan. If you have more questions about mortgage loans or any part of the home buying process talk with an agent.
This guest post is written by Emma Sturgis a freelance writer based in Boston, MA. When not writing, she enjoys rock climbing and reading. Say hi on Twitter @EmmaSturgis2
