With home prices still fairly low in many markets, it is little surprise that some think that now is a great time to buy. Buying a house is a big commitment, and it’s a big expense. The expense of buying a home can be made even bigger when you pay a higher mortgage rate. Even a difference of 1% with your mortgage rate can mean that you pay thousands of dollars extra over the life of your home loan.
As you look to buy a home, consider these strategies for getting a better mortgage rate.
We live in a society that equates a bigger, more expensive house with a better situation. However, it doesn’t always make sense to buy a more expensive house — even if you are approved for it.
If a bigger mortgage makes you look like more of a risk to the lender’s underwriters, you might be required to pay a higher interest rate. In some cases, if you get a very large loan (a “jumbo” loan), you might have a higher interest rate just on general principle.
Rather than buying a more expensive house, consider purchasing something a little bit smaller. Not only will you have a more affordable mortgage with a lower interest rate, but you will also smaller expenses in general. A bigger, more expensive house comes with higher property taxes, utility bills, and other costs.
One of the best things you can do for your mortgage rate is to improve your credit situation. Your best results come when you have excellent credit. If you want access to the best interest rates on a mortgage, you need good credit. Before you start house hunting, and looking for a mortgage, check your credit score and report, and pay for an official FICO score. This will help you get a good idea of how lenders view you, and it will help you figure out how to proceed.
If you don’t have excellent credit, take a few months to work on improving your situation. Monitor your credit so that you know whether or not the situation is improving. You can boost your credit score by paying your bills on time, and by paying down debt (but not canceling credit cards quite yet). Work on getting your credit up to scratch if you want the best mortgage rate.
The heady days of zero down mortgages are mostly long past. However, that doesn’t mean that you can’t get a mortgage with a fairly low down payment. You might be able to get a mortgage with as little as 5% down, and if you get a FHA loan, you can get away with as little as 3.5% down.
However, if you want a better interest rate, and to avoid PMI (for a conventional loan), you need a bigger down payment. You can get a better interest rate with 10% or 15% down, and you can completely avoid PMI if you put down 20%. FHA loans come with their own costs, so it helps to understand that situation, and consider a bigger down payment to help you move beyond the fees related to a FHA loan.
You can also pay points up front. A point is 1% of the mortgage amount. Each point you pay can reduce your interest rate by 0.25%. Over the course of 30 years, this can make a difference. If you can pay points, that can help you avoid paying more over time. But this strategy often works best when you plan to stay in your home for a rather long period of time.
The more you can do to prove yourself less of risk of default, the better your interest rate is likely to be. At the very least, you need to make sure that your credit situation is good order before you start looking for a house or applying for a mortgage. Getting a mortgage is such a big step that you don’t run into any unpleasant surprises while you’re sitting in the lender’s office.
Save up money for a down payment, fix your credit, and consider what else you can do to improve your situation. You’ll end up with a better score, and save money over the long haul.
Photo by Muffet.
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I'm just an average mom, trying to live a frugal life and get out of debt. I write about things that have (and haven't) worked to improve my family's financial situation. What works for me may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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