Buying your first home is a very exciting time. As excited as you are to start house hunting, it is very important to compare mortgage interest rates offered by the different lenders and companies like Lowest Home Loan Rates can help you with that. Being approved for a mortgage is great; however, if you don’t get a low-interest rate, it can add thousands of dollars to your loan.
For example, over the course of a 30-year mortgage, the difference between a 4.0 percent rate and a 3.7 percent rate is $5,000 for every $100,000 that was borrowed.
Fortunately, there are several tips you can follow to ensure you get the lowest interest rate possible.
#1 Check Your Credit Score and Report
The first step in getting a mortgage is checking your credit score. If you don’t know your score, you can get it for free on websites such as Credit Karma. If your score is low, it might be best to wait until you can increase your score a bit.
You should also get copies of your credit report from Equifax, Experian, and TransUnion, the three major credit bureaus. When requesting your credit report from Experian, you will be given a FICO Score 8, which provides insights regarding what you should do to boost your score. However, it is best to pay $4.95 for a FICO Score 2, which is the report mortgage lenders use.
You should review all your reports to check for errors that could be bringing your credit score down so they can be corrected.
#2 Work On Your Credit Score
If your credit score is lower than 760, you may want to work on your score before buying a home. First, you should start paying down your credit card debt and any loans you have before applying for a mortgage. The less you owe, the higher your credit score will be.
Experian Boost is another way to improve your credit score a bit. After signing up, every on-time utility payment, cellphone bill, and streaming service payments will be included in your payment history, increasing your credit score.
You may still be able to get a mortgage with fair or poor credit; however, you should expect to pay tens of thousands of dollars more over the life of the loan.
#3 Save Up More For the Down Payment
It is a good idea to save as much as possible for the down payment. If you don’t put down enough, your lender will consider you a high-risk borrower. If you plan to put down less than 20 percent on your new home, your lender may require you to take out private mortgage insurance (PMI) to protect themselves, which will add more money to the cost of the loan. You can cancel the insurance when you have enough equity in your home; however, you will have already paid a large sum of money that you cannot get back.
If you put over 20 percent down, you won’t be considered a low-risk borrower and can offer you a lower interest rate.
#4 Consider a Shorter-Term Loan
If you don’t want to wait to increase your credit score and don’t have over 20 percent for the down payment, you could take out a shorter-term loan, as shorter-term loans are typically lower than the standard 30-year loan. For example, in 2020, the typical 30-year fixed mortgage rate was 2.87 percent, while a 15-year fixed mortgage was 2.35 percent.
#5 Increase Your Income
Increasing your income will help you get a lower interest rate. The lender will check your debt-to-income ratio, and they need to know how much money you make and how much you are in debt to determine if you qualify for a mortgage and your interest rate.
For example, if you make $7,000 a month and have $3,000 to spend on the mortgage and other bills, you will be paying 42.8 percent of your income on these costs, which isn’t a good debt-to-income ratio. If you get a second job and make an extra $1,500 a month, you will be spending 35.3 percent of your income on your mortgage and bills, which is a good number. Ideally, your debt-to-income ratio should be 36 percent or less to qualify for a low-interest rate.
#6 Decrease Your Debt
Decreasing your debt will improve your debt-to-income ratio, helping you get a lower interest rate. You can start paying down your debt by first focusing on your credit cards with the lowest balances to get them settled, then start working on your higher balance bills.
When you have paid down enough debt that your debt-to-income ratio reaches 36 percent or less, you can start shopping around for lenders.
#7 Apply With At Least Three Lenders
There are thousands of mortgage lenders competing for business; therefore, you should apply with at least three lenders to see what interest rates you qualify for. Each lender will give you a loan estimate, including the interest rate, closing costs, and other key details about the mortgage. This will help you choose the lender who is offering the best deal, ensuring you get the lowest rate.
Buying your first home is a considerable achievement; however, before applying with lenders, you should follow the tips above to ensure you get the lowest rate possible.