Buying a home is an exciting and stressful undertaking. Location, remodeling, and cost are among the multitude of considerations. As many homebuyers discover, affordability goes further than the sticker price. Without a fair interest rate, you could be spending more than you think. Follow the tips below to secure the best rate. The results could save you thousands of dollars.
- Get serious about credit repair. The key to finding a competitive and affordable interest rate is simple: good credit. Raising your score will open doors to several financing options that are only available to low-risk borrowers. Begin your credit repair efforts by:
- Reviewing your credit reports, and don’t forget that there are three of them, one from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Be sure to highlight unfair or inaccurate information, and prepare the appropriate communications for your creditors as well as the credit bureaus.
- Pay off outstanding debts
- Reduce your credit utilization ratio by paying down credit card balances. Ideally, you should never charge more than 25 percent of your maximum limit.
- Cut back on new credit applications. Flooding your credit reports with new accounts could be risky when shopping for a mortgage. Stick to using your current accounts in the months before buying a home.
- Reduce your debt to income ratio. Although technically not a “credit repair” issue per se, mortgage brokers in particular will give particular consideration to your debt-to-income ratio, or the amount of debt you hold vs. your gross annual income. Ideally, your ratio should never exceed 36 percent, which includes the cost of your mortgage payments. If you hope to find a low interest rate, however, start striving for an even lower ratio. Work to pay off your debts as soon as possible to demonstrate your commitment to balanced finances. Responsible repayment habits suggest low risk, and low risk can result in even lower interest rates.
- Provide references. Steady income is the foundation of maintaining a mortgage. While lenders usually require basic information (e.g., employer name, annual salary, etc.), providing additional references could help your cause. Ask your boss to write a letter of recommendation, including proof of your salary, the possibility of promotions, and any other relevant future opportunities. The extra documentation will help establish your financial security and increase your borrowing appeal.
- Save for a down payment. Equity is an important bargaining chip when shopping for a home. In the wake of a housing market crisis, the days of “zero money down” are over. When deciding on home affordability, factor in your ability to save for a down payment. Bringing money to the table will reduce your monthly payments and help you secure a lower interest rate. While 20 percent is ideal, even 5-10 percent could help you in the long run.
- Find a qualified lender. A licensed lender is not necessarily a qualified lender. While they may have the power to broker a deal, they may not have the skills to land the best rates. Find an advocate who asks questions to help you along the way. While a decent lender may quote a 30-year fixed rate of 4.875 percent, an exemplary lender offering the same rate might also ask:
- Is this your first home?
- Do you have long-term plans for this property, or do you plan to move in a few years?
- Have you considered the benefits of an ARM or 15-year mortgage?
- Would you like to see additional payment plan options?
Work with a professional who is willing to go the extra mile. They are likely to have the inside track on affordable rate options.
- Do some solo research. Finding a reliable lender is half the battle, but don’t forgo some independent research. When searching for a competitive rate, using a loan aggregator can help you view offers side-by-side. Such online resources are good for those who prefer to do their homework before making a lasting decision.
- Consider a 15-year mortgage. Securing a mortgage with a fixed interest rate is the safest way to finance a home. However, the traditional 30-year timeframe isn’t the only option. A 15-year fixed mortgage offers the same protection while allowing you to pay off your home in less time. In addition, 15-year interest rates are typically a few percentage points lower. If cost-effectiveness is your top priority, review your budget to see if this option is the best fit.
- Weigh closing costs carefully. So, you have just been approved for a home loan at 4 ½ percent. Great, right? Maybe not. Many buyers do not factor closing costs into the Annual Percentage Rate (APR), or the cost of borrowed money at an annual rate. While the APR is meant to represent your initial note rate, such stated rates do not include additional fees associated with the procuring the mortgage such as underwriting, appraisal fees, lender charges, processing fees, etc. These extras could quickly inflate your stellar rate to a percentage point or even more. When shopping for a mortgage, make sure to ask for the bottom line.
- Put the past (far) behind you. Unfortunately, some credit mistakes can carry long-term consequences. Charge offs, bankruptcies, and foreclosures have the power to hurt your credit score for up to seven years. While the damage is done, your credit score is likely to improve with time. In the world of real estate, clean credit is the best way to find a good deal. If you want a fair interest rate, give your credit time to rebound before jumping into the home buying market. Alternately, a credit repair law firm may be able to leverage your consumer protection right to fair and accurate credit reporting in order to improve your creditworthiness in less time.