Buying a home is one of the most significant purchases the average person can make. As of February 2019, the median value in the US is $236,000. Since most Americans don’t have that kind of cash available, it’s necessary to take out a mortgage to buy a home. A mortgage is a home loan that you pay back with interest to a lender over a number of years.
When you’re ready to get a mortgage, you want to set yourself up to get the best possible rates– which are based on your credit score, your income, and your assets. That being said, here are some tips to improve your rates:
1. Boost Your Credit Score
A credit score is based on a formula calculated to predict your creditworthiness. The score is based on credit history, payment history, types of credit used, outstanding debt, and length of credit history. The score is three numbers and most credit scales range from 300 to 850.
You want to shoot for a score between 670 to 700, by most credit scale standards, to have a good score. Many lenders use credit scores to help guide their lending decisions. However, each lender has a different level of risk they’re willing to take on for each credit product they offer.
You can improve your credit score by:
- Reviewing your credit report annually
- Disputing any errors
- Paying down credit balances
- Setting up payment reminders so you pay on time
- Improving your credit utilization
2. Save Up For a Down Payment
The more money you can pay up front for a house, the lower your mortgage rate will be– especially if you have enough liquid cash to fund 20% of the down payment. While lenders won’t require you to pay 20%, paying less of a down payment will usually mean you have to pay private mortgage insurance– which can be 0.5 to 1% of the original loan amount you’re paying on top of the mortgage payments annually.
Once you pay down your mortgage to less 80% of the total value of your home, you no longer need to pay mortgage insurance.
3. Adjustable-rate Mortgages If It’s Not Your Forever Home
An adjustable rate mortgage is a mortgage with a fixed rate of interest for only a set period of time, typically one, three, or five years. With this loan, the interest rate can change over the course of the loan at different intervals and the rates for this loan are dependent on market conditions.
If you don’t plan to live in a home for the long haul, taking out a traditional 30-year fixed-rate mortgage may not make financial sense. Instead, it makes sense to consider an adjustable-rate mortgage because the rates are slightly better in the short term.
4. Go for a 15-year Fixed-Rate Mortgage If It’s Your Forever Home
A fixed rate mortgage is a loan where the interest rate stays the same throughout the life of the loan. Terms of fixed-rate mortgages range from 10 to 40 years.
30-year fixed mortgages used to be the go-to option for homebuyers. But if you think you’ll be in your new home long term and have good cash flow, a 15-year fixed-rate mortgage will help you pay off your house sooner and avoid paying more interest rate over time.
5. Shop Around for Lenders
Look around for the best rate even if you’re refinancing. There are a lot of lenders out there. Do your research so you can be sure you’re getting the best rate for your situation. It’s just like shopping for a car– you wouldn’t settle on a car without test driving a few first. Talk to multiple lenders and look at your options online.
6. Lock In Your Rate
Closing can take a long time– weeks, sometimes even months. Mortgage rates can fluctuate over this time, so once you find a good rate you want to make sure you lock it down. So after you sign the home purchase agreement and have secured your loan, ask your lender to lock in your rate. Locking in your rate may come with a fee but it could be cheaper than risking the rising rates.
Following these tips will help you find the best mortgage for you and your circumstance. Navigating mortgages can be tricky, so it’s best to talk to people in the real estate industry about finding the best rates.
Contact REsolutions to get started with the home buying process and as well as some recommendations on where to get your home loan.