August 12th, 2015 9:12 AM by Jackie A. Graves, President
A low mortgage rate can mean savings tens of thousands of
dollars over the term of your home loan. Getting the cheapest mortgage rates
isn't a matter of simply asking, however. The best rates come when you meet the
qualifications lenders prefer. Here are some tips for qualifying for the best
home loan rates:
Manage Your Credit Score
When you apply for a home loan, your credit score will be
one of the criteria used to judge you. Without an excellent credit rating, you
might not receive the lowest available rate. Lenders provide you with the
capital you need to make your home purchase, and they like to know that you are
likely to repay the loan. In the financial world, a good credit score indicates
a low default risk; lenders feel more comfortable with the idea that you will
meet your obligation and they will get their money back. A higher interest rate
is designed to help lenders offset default risk.
If you plan to apply for a mortgage, it's important to
check your score well ahead of time. You have a different score, often based on
the formula sold by FICO, with each of the three major credit bureaus. Obtain
your scores, and review your credit report. Fix errors that might drag your
Checking your credit score ahead of time can
also help you identify trouble areas and work to fix them. Pay your bills on
time and reduce your level of debt, and your credit score will improve to a
point that might allow you a better shot at the cheapest mortgage rates.
Make a Bigger Down Payment
A larger down payment can help you qualify for lower
rates, as well as save you money on mortgage insurance. The bigger your down
payment, the smaller your loan. Additionally, when you have more "skin in
the game," many lenders feel that you are more likely to do what it takes
to make your loan payments and keep your home.
Not only can a bigger down payment help you get a better
interest rate, but it can also help you save on payments because you might not
have to pay any mortgage insurance. If you put 20% down on your home, typically
you won't have to pay mortgage insurance premiums at all.
Choose a Shorter Loan Term
The cheapest mortgage rates are often associated with
shorter loan terms. A 15-year loan usually has a lower interest rate than a
30-year loan. It is important to pay attention to other terms as well. A
fixed-rate mortgage often comes with a higher interest rate than a variable
loan. However, the variable loan can see a rate hike over time while a fixed-rate
remains the same over the life of the loan.
There are some products, like hybrid ARMs, that feature a
fixed rate at the beginning of the loan, but then become variable after a set
period of time. In some cases, it's possible to get a mortgage that has a cap
on how high the interest rate can go. Carefully research your options.
Sometimes, a lower initial interest rate is offset by a higher rate later. Run
the numbers to see what is likely to work best for your situation.
Another way to get the cheapest mortgage rates is to pay
points. A point is equal to 1% of the purchase price of the home. So, if you
buy a home for $150,000, one point would cost $1,500. Each point you pay up
front lowers your interest rate a little bit. If you stay in your home for a
long time, the interest savings can be worth the upfront cost. However, if you
move within a few years of buying, the points you pay probably won't be worth
Your mortgage interest rate matters. Because
a home loan is such a large commitment and is paid over such a long period of
time, even a 1% change in your rate could mean a difference of tens of
thousands of dollars. Plan now to qualify for the cheapest mortgage rates possible.
By Miranda Marquit – To view the original
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