How Home Buyers Can Get a Better Mortgage Rate
Interest rates have been a hot topic and a hot headline for a while now, especially for those thinking about buying a home. The goal for home buyers is to get the lowest interest rate possible and there are things to focus on if you’re trying to lock in a low rate. If you want to get a better mortgage rate, it’s important to be proactive.
During the last couple of years we saw record lows for interest rates. They say all good things must come to an end and it appears low interest rates have done just that … at least for now.
Despite the doomsday headlines we hear, there are ways to combat high interest rates and lock in a lower rate.
What is a Mortgage Rate?
Most home buyers get a loan when they’re buying a house. The monthly payment is usually made up of the principal, interest, taxes, and insurance, and the mortgage rate determines how much interest you’ll be paying on the loan. The higher the rate, the more you’ll pay in interest.
How to Get a Better Mortgage Rate
Save for a Bigger Down Payment
The amount you’ll need for a down payment depends on the type of loan you’re getting. You’ll usually need at least 3% down payment for most loans although there are loans that require zero down payment.
In general, a larger down payment means a lower interest rate because there’s a lower level of risk for lenders when the loan amount is lower and the buyer has more money invested in the property.
Protect Your Credit Score
Credit scores are a big factor in securing a mortgage. When a lender sees that you’ve paid back your loans and used credit wisely, they are more likely to approve you for a mortgage with a lower interest rate. Your credit score is indicative of your risk.
It’s a good idea to pull a credit report annually and check it for errors.
Decide on a Loan Type
There are many types of loans with different terms and different eligibility requirements. Different loan types can have significantly different interest rates. A lender will let you know the loan types they offer as well as the loan types you qualify for.
Decide on a Loan Term
Another factor to consider is the term of your loan. The loan term is the length of time it will take you to repay the loan. The term affects the interest rate, the monthly payment, and the total amount of interest paid over the life of the loan.
Most loans have a thirty year term but there are shorter terms available.
Buy Down the Interest Rate
In the last year, as the market has changed and interest rates have increased, we’re seeing a lot more interest rate buydowns.
Most commonly, I’ve been seeing a lot of seller-paid 2-1 buydowns. The seller pays a one-time concession at closing that reduces the buyer’s interest by 2% the first year and 1% the second year before the rate goes back to the original interest rate on the loan. The hope is that after the first two years are over, interest rates have dropped and the buyer might be able to refinance at a better long term rate.
Talk to a Trusted Lender
The best place to start is by talking to a trusted lender … or two. Different lenders often have distinct loan products, all with their own rates and fees, so shopping around is a good idea.
A lender can also give you great information on the way to home ownership. They’ll let you know how your down payment factors in to your monthly payments, how your credit score affects the overall picture, and what you can do to lower your interest rate.
