Best Mortgage Rate Tips
Getting the best rate on your mortgage is a major concern for any home buyer. Everyone wants to get the lowest mortgage interest rate possible!
When you consider that only a few percentage points can cost you thousands over the life of a loan, it only makes sense to seek the best mortgage rate you can get.
Buying a home is already going to cost you lots of money. There is no reason to pay more than you have to. Many home buyers do not take the steps necessary to get the best mortgage they can.
One of the best ways to ensure you will get the best terms and conditions is to prepare ahead of time before getting a mortgage. Being completely comfortable with your finances is one of the keys to being smart financially.
Take a look as I share some of my tips on how to get the best mortgage rates and terms possible.
Ways to Get The Lowest Interest Rate
- Compare lenders – Depending on where you are financially and how many loans you have taken out before; you may be unaware of just how much the variation in loan rates from lender to another lender will affect what you wind up paying. Particularly for people who are buying their first home, it can be tempting just to grab any loan you can get your hands on and feel lucky for the money. But this is not a good idea. Even if a home loan only varies by a fraction of a point, you could wind up paying $10,000 or more in additional interest – depending on the amount borrowed and how long you take to pay it back. Ten thousand dollars is enough to make even well-off individuals take a long pause. Take the time to shop around for your loan to avoid paying a lot more money.
- Perfect your credit – One of the most important factors in getting the best rate on a mortgage is your existing credit. Most people today understand that their credit score is the single biggest factor in the loan rate they will get from the lender. However, not everyone realizes just how important it is to repair their credit score before taking out a loan. What more people should learn is how to increase their credit score! A few extra points could save you thousands of dollars over the life of your loan. Fixing your credit can take time, but it is time well spent. Get your credit reports, challenge any incorrect information on them and then go through the sometimes lengthy process of cleaning up your debts and collections. You want your credit cards paid down, and groups paid off before you attempt to borrow – at least if you want to get the best possible rate.
- Be upfront with your lender – If you are in a situation where some dings in your credit history cannot be easily repaired, try to be upfront with your lender about them. After the problems in the 2000s with the real estate market and lending practices, all lenders are on high alert for any issues with borrowers. They will go through your information with a fine-toothed comb to ensure they are safe in their lending practices. Better to notify them now about issues than to be caught lying – and possibly lose out on your chances of getting the loan. Honesty has an additional benefit. The loan officer is there to help you get a loan, and he or she will often do a lot to see that happen. Letting the lender know now about issues will allow the loan officer to give you advice and work with you to fix any major problems so you can get the loan. If you are buying a home, your lender will issue what is called a pre-approval letter. The last thing you want to do is get caught in a position where you have exaggerated your finances. This could cause you to lose out on your potential dream home!
- Pay as much down as you can – One thing has not changed about lenders – they still love a big down payment. Before you go to buy a home, try to come up with as much money as you can to put down on it. This will make you look favourable to the lender and will improve your mortgage. The less money you have to borrow – and therefore pay interest on – the less you will pay in interest. And interest can be a killer on a big home loan paid off over a 30-year period. If you can only come up with some much cash on your own, consider asking family members or friends for help. If they are in a position to assist you with down payment money, most lenders will accept such money as long as it is accompanied by a letter demonstrating that it is, in fact, a gift. As long as you don’t have to repay the money the lender will view it as an improvement to the loan. If you can get to a 20 percent down payment, by all means, do so! By putting down at least 20 percent you avoid what is called private mortgage insurance or PMI for short. This type of insurance protects the lender in the event of default on the loan by a borrower. It is money that you mostly are throwing away every month as it does nothing for you. If you cannot come up with the 20 percent needed to avoid PMI you should do whatever you can to get rid of it as soon as possible.
- Consider a credit union – There are plenty of banks out there willing to lend money to home buyers. Unfortunately, not all of them will give you a good deal. Some will offer you a downright bad deal, so keep your guard up when you are shopping around for a mortgage. Many people discover that their local credit union has better lending policies for its members than regular commercial banks. The credit union is owned by the members and therefore has an incentive to take care of those members. This means you might be able to get a better loan with your credit union. Granted, this is not always the case. But it certainly doesn’t hurt to shop around with both credit unions and banks before you decide on a mortgage.
- Use a mortgage broker – Over the many years of selling real estate, quite a few of my clients have asked my why they should use a mortgage broker. My answer is simple – a mortgage broker essentially can get financing from some different sources they have built relationships with. Since they have many sources they can turn to the odds are better, they can find a better deal for you than if you went shopping on your own. For example, let’s say you are looking to take out a loan for $250,000. You prefer a fixed rate over thirty years and don’t want to pay any points or closing costs. When walking into the local lender and get their rates and terms, these may not be the best you can get. By just visiting one financial establishment you have limited yourself to getting the best deal. A mortgage broker will take your desire for a 30 year fixed rate with no points and closing costs and shop it around to numerous lenders. This really can be a win-win for you!
- Pay points or not – Sometimes it makes sense to pay points and at other times it does not. For those that don’t know, a point is one percent of the amount you are mortgaging. So if you are mortgaging $250,000 one point would equal $2500. What paying points does is buy down your loan rate. The more points you generally pay, the lower rate you will get. The way to determine whether it makes sense to pay points or not is by projecting how long you will remain in the home. You need to understand the difference in mortgage payment between paying points and not paying points. There will be a certain period whereby the difference will be made up by how long you remain at the property. The longer you stay in a home, the better off you will be by paying points. One exception, however, could be if rates are dropping by a large margin and you find yourself refinancing right away.
- Fixed rate or adjustable – Whether or not you should go with a fixed or adjustable rate again comes down to timing. If you only plan on being in the home, a short period and adjustable rates are significantly lower than a fixed rate it could be a good idea to go that route. Only you can decide. Sometimes if there is not that big a spread, it might not be worth the gamble especially if rates rise and your plans change.
- Get a good faith estimate – lenders are now required to give you what is called a “good faith estimate” of all the costs associated with your loan. This is so you can intelligently compare apples to apples with the loan terms you are considering. For example, while one lender may have a 1/4 percent better rate what if the costs they are charging associated with the loan are significantly higher? While you may think the loan with a 1/4 percent rate is the winner in actuality it may not be! It is crucial to scrutinize all fees and costs with a fine tooth comb.
- Limit your mortgage shopping to a two-week period – Your credit score can only weather so many credit inquiries before it begins to drop. If you keep shopping for mortgages beyond the 14-day period, it could result in a lowering of your credit score – the last thing you need when you want to get the best possible mortgage. Search carefully and compare all your options, but avoid doing so for too long.
- Lock your rate when appropriate – One of the things a good mortgage broker or lender can do for you gives you their best guess on where interest rates are headed. If the trend is moving downward, it may make sense to hold off on locking your mortgage rate. If that is not, the case and interest rates are trending upward make sure you lock your rate! Over the years I have seen people needlessly gamble for as little as a 1/8 of a point. There are times when gambling like this does not make sense especially if your finances are tight, to begin with.
- Miscellaneous – once you have your mortgage commitment letter don’t think you are out of the woods before closing on your home. Some borrowers have made some mortgage mistakes that have cost them the ability to get a loan. I have summarized the top mortgage mistakes you need to avoid, so you’re not kicking yourself!
By following the advice above you should be able to put yourself in the best position to get the lowest mortgage interest rate.