October 27th, 2016 7:32 AM by Jackie A. Graves, President
home is probably the biggest purchase Americans will ever make. This has been
especially true since the late 1990s, where home prices have increased well
beyond the national inflation rate.
But a home
purchase isn't anything to be taken lightly. It's a large financial obligation,
and if you aren't aware of the financing options available, it could wind up
costing you far more than you'd expect.
your homeownership costs begins with your mortgage and the interest rate
attached to that mortgage. The lower you can push your mortgage rate, the less
money you'll pay over the life of the loan. With that being said, here are 10
ways you may be able to lower your mortgage rate.
1. Maintain a good credit score
of a low mortgage rate begins with keeping your credit score as high as
possible. Lenders look at your credit score as a roadmap to your
creditworthiness. A high score could alleviate worries that you'll eventually
repay your loan, while a low score could entice lenders to charge you a higher
mortgage rate, or not lend to you at all.
three reporting credit agencies (Experian, TransUnion, Equifax) tend to be
quite secretive about how their scores are calculated, FICO credit scores are
calculated as follows:
35% is based on your payment history, so make those payment on
30% is based on your credit utilization, meaning you should do
your best to keep your aggregate utilization under 20%, if possible.
15% is based on length of credit history, so avoid closing
accounts you've had for a long time that are in good standing.
10% is based on new credit accounts, which means you should only
open new accounts when it makes sense to do so.
10% is based on credit mix, which means lenders want to see that
you can handle different types of loans, such as installment loans and
2. Have a long and consistent work history
On top of a
good credit score, lenders also want to see a consistent and long-tenured work
history. If you've been working at the same place for many years and have
consistent or growing annual income, lenders will be more likely to give you a
home loan with an attractive rate.
you've changed jobs multiple times recently, lenders may be more leery of
giving you a big loan because your income isn't as reliable. Banks and credit
unions will verify your employment status before you make an offer on a home
and before the closing date of a home purchase. If you've changed jobs or quit
during the closing process, it could jeopardize your ability to get a home
3. Shop around for the best rate
One of the
smartest moves prospective homebuyers can make is to shop around for the best
mortgage rate possible. Shopping around is a lot easier today than it was just
20 years ago thanks to the advent of the internet. It's pretty easy to compare
mortgage rates from online banks against national banks and/or local credit
unions to see which financial institutions offer the most attractive rates.
are an especially good place to shop around because they tend to have lower
fees than traditional banks, and they pass some of these savings on to their
members. Credit unions may also be more willing to work with consumers who have
less-than-stellar credit profiles.
4. Ask your bank/credit union for a better rate
for groundbreaking advice: Ask your bank to lower your rate. There are far
worse things you'll be told in life than "No," but that's the worst
possible answer you'll hear in this instance.
have an exceptional credit score of 800 or higher, which one in nine Americans
has according to FICO, it could be worthwhile to ask your lender to match a
competitor's interest rate, or to simply request a lower interest rate based on
your exceptional credit history. Lenders want the business of people with
excellent credit scores, and they'll sometimes go to bat, so to speak, in order
to get their business.
5. Put more money down
take into consideration how much money you plan to put down on your home
purchase. A small home loan, say $100,000 or less, means banks often charge a
higher rate in order to make a decent profit. Likewise, home loans in excess of
$417,000 are classified as "jumbo loans," and are perceived to carry
more risk for the bank. These usually carry a higher interest rate, too.
may benefit by putting more money down on a higher-priced home purchase and
landing in the sweet spot between these two figures. Putting enough money down
to lower a home loan out of the jumbo loan category could save you thousands of
dollars, if not more, over the life of your loan.
6. Shorten your loan
keen way to lower your mortgage rate is to consider shortening the length of
your loan. The 30-year mortgage is traditionally how Americans purchase a home.
However, financial institutions incentivize homebuyers who repay their home
loans more quickly.
Taking out a
15-year, 10-year, or shorter-length loan than a 30-year mortgage will almost
assuredly lower the interest rate you'll pay, which also reduces the overall
cost of the loan. According to Bankrate,
as of Oct. 13, 2016, the average fixed 30-year mortgage had an attached rate of
3.45% compared to just 2.70% for a 15-year fixed-rate mortgage. This
75-basis-points may not sound like much, but a $200,000 loan with a 3.4%
interest rate over 30 years would have a total cost of $319,306 according to
Bankrate's loan calculator compared to a total cost of $244,304 over 15 years
at 2.75%. That's $75,000 in savings that you get to keep!
7. Consider the adjustable-rate vs. fixed-rate
consideration homebuyers can make to lower their mortgage interest rate is the
adjustable-rate versus fixed-rate trade-off.
mortgages typically offer a teaser rate for five or seven years that's lower
than the average mortgage rate. However, adjustable-rate mortgages adjust
higher to match the prime rate plus whatever the federal funds target is once
this teaser time frame has ended. For consumers who are unprepared, or in
instances where a large shift has occurred in interest rates over a five- or
seven-year time frame, homebuyers could see a crippling increase in their
monthly mortgage payment
If you have
the ability to pay off your home loan very quickly, a loan with a teaser rate
may be worth considering. On the other hand, fixed-rate mortgages leave nothing
to chance. You know what you're getting upfront. This trade-off is something
homeowners should consider.
8. Pay for points
prospective homeowners may opt to pay for points. Points are an upfront fee
paid by homebuyers to lower their mortgage rates. Each point is equal to 1% of
the value of the loan, and paying a point typically lowers your ongoing
interest rate by 0.125%. For instance, paying a point on a $250,000 loan would
cost an extra $2,500, but it would reduce your interest rate by 0.125% over the
life of the loan.
you pay for points? The smartest time to pay for points is if you're going to
remain in your home for a long time. Reducing your mortgage rate will result in
money saved over a 15- or 30-year time frame. But as NerdWallet points outOpens a New Window., most Americans only
stay in their homes for an average of nine years. This is a trade-off that
prospective homebuyers should weigh.
9. Set up automatic mortgage payments
the simplest things can save you money. While you'll want to check with your
financial institution to see if this is offered, setting up an automatic
mortgage payment that ensures you're never late can result in your bank
offering a lower ongoing interest rate. Just keep in mind that, if you close
your account or change banks, your original lending bank could remove the
interest rate discount applied for setting up an automatic mortgage payment.
homeowners looking to lower their monthly mortgages should strongly consider
refinancing their existing mortgages. Mortgage rates are still near historic
lows, meaning homeowners paying 100 basis points or more over the current rates
may benefit from refinancing.
should be following all of the aforementioned suggestions -- especially
shopping around for the best rates -- when looking to refinance, but they'll
want to use a mortgage-loan calculator to decide whether refinancing, including
refinancing fees, is really worthwhile.
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