April 8th, 2019 9:46 AM by Jackie A. Graves
a house may be the largest purchase most consumers ever make. So it’s
surprising that over half (52 percent) don’t
shop around for a lender. That’s like buying the first car you see
or trusting that one gas station will always give you the best price.
oversight that could hit your wallet in a big way. Not comparing mortgage loan
terms from several lenders, to potentially get a lower interest rate, could
cost you tens of thousands of dollars over the life of your loan.
To get the
best rate possible, the first thing you’ll want to do is make sure your credit
will use your Fair Issac or FICO credit score when they price your loan.
Typically the higher your FICO credit score, the lower your interest rate will
If you don’t
know your FICO credit score?and they range from a low of 300 to a high
of 850?find out. Some credit card companies and
banks will provide customers with their FICO credit score for free, or you can
order your score at FICO.com.
a tool that lets you calculate the different rates you might
expect for certain credit score ranges. (Note, these are expressed as annual
percentage rate or APR estimates, which is the interest rate plus other fees
and costs of the loan spread over 30 years.)
If your FICO
credit score is lower than you’d like, you can
take steps to improve it. But you should start this process long
before contacting mortgage lenders, because it can take several months (or
years) to see a change in your credit score depending on where you start and
your end goal.
There are a
number of apps and free services out there that can help you set up a budget
and improve your spending habits, or you can contact a HUD-approved housing counseling agency.
Most will offer online, telephone, and in-person options. These agencies should
provide information about their services and fee structure for free. If a
service doesn’t do that, consider going elsewhere.
the Consumer Financial Protection Bureau, warning
signs for credit repair scams include companies that ask for
payment before providing services (which is illegal) or guarantee a specific
(and large) increase in your credit score. Don’t let these companies fool you.
credit score is based on information from your credit report. You’d be
surprised at how often errors occur?and those errors could
make it harder for you to qualify or secure that lower interest rate.
By law, you
can request a free copy of your credit report annually from each of the three
reporting agencies?Equifax, TransUnion,
Information on disputing an entry can be found on the agencies’ websites.
include copies of any documentation, such as acknowledgement letters from
creditors, about entries you are disputing.
credit is in order, you’re ready to meet with lenders. Notice we used the
You should always comparison shop to make sure you find a lender you are
comfortable working with and compare several loan estimates, noting the
interest rates and also the fees (which will be reflected in the APR).
to your local bank or credit union, or lenders referred by real estate
professionals or friends, you can
find local lenders on Zillow to provide loan estimates. Or you
rates on Zillow anonymously to compare offers from multiple
lenders, all in one place.
ask how much you plan to put down. Obviously, the more you put down the less
you’ll have to finance.
will put 20% down to alleviate the need to purchase private mortgage insurance
or PMI. Putting 20% down gives you more might also help you be a competitive
buyer and stand out to the seller in a competitive-bid situation. And it may
help you qualify for a lower interest rate, which can help you pay thousands
less in interest over the life of your loan.
that much for a down payment can be difficult for some buyers. If your
resources for a down payment are stretched, consider home buyer assistance
programs from local housing agencies. There’s a free tool at Down Payment Resource to help you
search for programs in your area.
mortgage points (also known as discount
points) can help you lower the interest rate on your loan. Points
are fees paid directly to the lender at the close of your loan. One point costs
1 percent of your mortgage amount (or $1,000 for every $100,000). Essentially,
this allows you to pay some interest upfront in exchange for a lower interest
rate, and the cost may be tax-deductible.
As a general
rule of thumb, you should consider paying points if you plan to own the home for
a long time.
has used your monthly income and debt to determine your debt-to-income ratio or
DTI. This number generally should not exceed 43% of your pre-tax income.
finance a major purchase like appliances, carpeting, or furniture before your
loan closes, you add to your monthly debt, which could raise your DTI and could
delay your loan close, or result in the loan being turned down in severe
So, in the
end, does getting a lower interest rate on your mortgage loan really matter? We
think the numbers in the accompanying chart speak for themselves.
(over 360 months)
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