For most people, your home is the biggest purchase you will ever make. It’s an investment not only of money but also of time and emotion. Choosing your home is a decision that you make meticulously, with lots of consideration and compromise. The paperwork that will pay for your home should have the same level of thoughtfulness and effort. Your mortgage will be a constant companion often for the first decades of home ownership, so the details are important. One of the essential details, as we all know, is the interest rate. That percentage will have a serious impact on your finances over the long term, so the lower, the better. Of course, we know that’s the goal, but how to get there? These tips will set you up to consider the major factors that could optimize the percentage point you’ll see over time.
Do Your Home Homework
When you start thinking about home, you should also start thinking about your mortgage provider. There are lots of options out there. Your current bank and a realtor will have plenty of advice, which can be solid advice. However, there are so many options for loans available these days that shopping around can prove valuable. Knowing the market will help you select the best lender for your needs, but will also be valuable research to improve your understanding of the options available to you.
Shop Til it Drops
Your mortgage is a lot of money for an institution, so you do have some leverage. With the knowledge you’ve gained from doing your homework, you can compare options and consider rates as well as fees for you mortgage. You’ll be better able to know if you can negotiate for a rate with a preferred lender based on other offers you’ve researched. You may have a low interest rate but it’s tied to lots of closing fees. If you shop around, you may be able to find that same low-interest rate with more favorable conditions.
Can You Give Me Twenty?
Do you have 20% of your ideal house cost saved? If not, start saving more, now. Of course, your deposit is a personal choice, but a 20% deposit will get you a better interest rate. With lesser deposits, the loan of 80+% of the money for your home is seen a higher risk scenario. To compensate, the lender will require a higher interest rate. In addition, this risk will likely also trigger an insurance to be paid along with your mortgage. Although it’s not directly your interest rate, it’s a fee that you will add to your overall cost.
Apply with the Best Credit Score Possible
One of the main factor in determining your mortgage interest rate is your credit score. Your credit score is a numerical assessment of your creditworthiness prepared by a credit scoring company by analyzing your credit report. A long credit history, with no missed payments, will boost your score. If you have a bankruptcy, the impact on your credit score is significant. If it happened many years ago, it may be worthwhile waiting until the 10-year mark when the bankruptcy comes off of your credit report and so your credit score bounces back, before applying for your mortgage. The effect of the bankruptcy lessons over time, but what appears on your credit report is something to consider. A helpful reminder is to not apply for a credit card before applying for your mortgage. Though your score won’t drop by much for one card application, it will drop. If you have the option to wait, you’ll go into your application with the best current score. Then, you can apply for the card after your mortgage is approved. Your credit score and credit report are your financial CV, so it’s best to have them as polished as possible when seeking your mortgage interest rate.
What’s Your Timeline?
Another major factor is how long you’ll be holding onto your mortgage. Are you buying this place to see your kiddos graduate? Or will you be looking to move across town and build on your real estate investment in a few years? Either timeline has its own tactics for reaching the best interest rate.
If you’ll be holding onto your mortgage in the long term, you may consider paying for points. When you’re setting your interest rate, you can pay an upfront fee to decrease your interest rate by a point, normally about 0.125%. The fee may be a few thousand dollars, but over the long term, that point will pay itself off. However, if you’re planning on selling the home within 10 years, you may not see the benefit.
Then, there’s the fixed versus adjustable rate debate. The side you should fall on also depends on the timeline. The most common type, the fixed-rate mortgage locks in your interest rate when you sign, and so you know what to budget for your monthly payments. If you’re seeking consistency and planning in the long term, this rate type may be the way to go. On the other hand, adjustable rates are set for a certain period of time, but then fluctuate according to the market. If interest rates drop, your mortgage rate drops. However, the opposite is true, of course. There is the initial fixed period (usually five years) where the rate is generally lower than a fixed rate. After the fixed rate period, the rate can fluctuate. If you’re planning on selling your home in the shorter term, you can benefit from the initial lower fixed rate, but be careful of planning for a lower rate in the long term as you could end up pay less or pay more each month.
Your home is an important investment and investigating your mortgage interest rate is essential. Shopping around, having an honest understanding of your expected timeline, saving for a significant down payment, and getting your credit score ready are ways to ensure you enter the application with your best foot forward. Your work now will pay itself off in the long run.