A home loan is a major investment—for most people, the largest investment they will ever make—and getting a loan is the only way most homeowners will be able to afford such a large purchase. The one factor that determines how much you will pay, both in monthly payments with principal and interest, and in the overall total amount you will pay over the life of the loan, is the interest rate. Here are some suggestions to help you get the lowest possible rate when you’re preparing to purchase a home.
Build Up Your Credit
Perhaps the most effective method for lowering your interest rate is having a credit score that is as high as possible. That means about a year before you plan to buy, you should:
• Review your credit report (you can get a free one every year from each of the 3 credit reporting agencies, Equifax, TransUnion, and Experian), and be sure to check all 3 since they can have different information on them
• Address any issues or inaccuracies that you see on the report immediately, it can take time to get them resolved and removed from the report
• Make all of your payments on time, including bills, auto loans, existing home loans, and revolving credit accounts
• Pay down your total debt amount as quickly as possible
• Don’t take out any new loans or undergo credit checks if possible within several months of your home purchase
Shop Around for Lenders
If you’ve never gotten a loan before, you might think that interest rates are a fixed thing, and the rates you get from one lender will be the same ones you could get from any lender. This is actually not true; different lenders evaluate loan risk differently and carry specific products or provide loans that others might not have. That means, just like shopping around for the best bid on car repairs, you can shop around and talk to several lenders about what they can offer before deciding on one.
Understand Loan Options
The most “traditional” loan is a 30-year fixed rate mortgage, but that’s certainly not the only choice you have. You may qualify for shorter-term loans, such as 15 or 20 years, or be eligible for no-down-payment loan options. You may also be able to get loans from the Federal Housing Administration (FHA) or the Veterans Administration (VA), both of which can offer better loan terms. Plus there are options for adjustable rate mortgages (ARMs) that could offer you lower payments and interest in the first few years of the loan, a benefit for someone who’s not planning to stay in the house for very long.
You may also be able to pay for “points”, which is essentially a process for paying up front to lower your interest rate. This can add up to a lot of savings in some cases, so it’s worth talking to your lender about it as an option.
Put Money Down
If possible, put money down on your home—up to 20 percent if you can. The more you can put as a down payment, the more loan options you will have available. In addition, it can help you avoid paying for private mortgage insurance (PMI), which can increase your monthly loan payments.
Call us today at 801.627.8700 to speak with one of our mortgage professionals and we'll help you figure out exactly what is out there, and provide you with tips and tools to reduce your interest rate if possible.