For most of us, buying a home will be the biggest investment of our lives. This is why mortgages are a key part of the home-buying process.
Depending on the total amount you spend, the terms of your mortgage matter a lot. These include the type of mortgage, interest rate, and length of time to repay it. Lowering your rate by a percentage point may save you thousands in interest.
Haven’t been keeping up with mortgage rate trends? Here are four tips that should help you get a decent mortgage rate.
1. Improve Your FICO Score
All lenders will use your FICO score to determine your risk as a borrower. With a lower score, a lender may think there’s a greater chance you’ll default on your payments. To cover this risk, they’ll likely charge you a higher interest rate.
The best way to improve your FICO score is to keep track of your credit report. If you notice any mistakes, try to fix them before applying for a mortgage. Also, pay your bills on time and consider paying down or eliminating credit card balances.
2. Make a Large Down Payment
Do you have enough liquid cash to make a 20 percent down payment? If so, you should do that, as it helps you get a lower mortgage rate. Once you pay down your mortgage to less than 80 percent of your home’s value, you’ll get rid of mortgage insurance.
If 20 percent is unrealistic for you, lenders do accept lower down payments as well. That said, anything less than 20 percent often means you’ll need to pay private insurance. Use a mortgage rate calculator to figure out the best terms for your situation.
3. Shop Around
When it comes to taking out a mortgage, most people look to their bank first. This may not always be the best deal, even with potential loyalty discounts. To ensure you’re making the right decision, you’ll want to explore your options.
Other than talking to lenders, consider asking an independent broker for advice. Try to find a broker who considers the whole market instead of a limited list of lenders. Of course, certain mortgages are only available from lenders directly.
4. Watch out for Fees
To cover the administrative costs of setting up a mortgage, you pay the arrangement fee. Mortgages with a low interest rate tend to have high arrangement fees. If your mortgage covers 70 percent or less of the buying price, go with a low arrangement fee.
Also, many lenders allow you to overpay your mortgage by up to 10 percent of the outstanding amount each year. This helps you repay the mortgage sooner and saves money in interest. Still, make sure that the overpayment fee isn’t too steep.
More on Getting a Good Mortgage Rate
One final tip: consider locking in your mortgage rate. A closing process can take weeks or months, and mortgage rates often fluctuate during this period. Locking in your rate may include a fee, but it pays for itself if the rates are on the rise.
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