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September 09, 2014

postBuying a new home is a big investment for anyone, both in terms of finances and the time involved. One challenge many homebuyers face is how to get a lower mortgage interest rate. Landing a lower rate impacts your future savings. Here are seven strategies to help you reach your goal.

1. Improve Your Credit Score

Mortgage lenders consider many factors when reviewing if you are eligible for a home loan. They might look at your current job and income, and how long you’ve worked at your current job. While each lender is different, all lenders definitely take into account your credit score. A credit score runs between 300 and 850, with the latter being the best. It is beneficial to have a general idea of your credit score. However, it is not smart to request it periodically because this could lower your score.

The most famous scoring system is FICO. Your FICO Score is based on five categories, with a percentage weight given to each. They are:

  • Payment history — 35 percent
  • Amounts owed — 30 percent
  • Length of credit history — 15 percent
  • New credit — 10 percent
  • Types of credit used — 10 percent

You want to prove to lenders that you yourself are a good investment and will not fail to make payments. The easiest method to start building credit is obtaining a credit card. Once you do, or if you have one or a few already, always pay on time. It’s smart to set up automatic payments so you never miss a chance to build up your credit. Having multiple credit cards does not hurt your credit score as long as your debt-to-credit ratio or the amounts owed is below 30 percent of your available credit.

2. Select a House and Loan Type

Before you jump the gun to the next strategy, it really helps to have a basic understanding of different loans. We at First Option know all the various loans can be overwhelming. We’ve been there with our own family members and friends, and we’re here for you. In brief, focus on knowing:

  • Your price range for a home.
  • How much you can put down initially.
  • How much you can set aside for a mortgage payment each month.
  • And a general idea of how long you need to pay back the loan, i.e., the loan term.

You should have a general idea of what type of home you want to buy and your price range. For instance, are you looking for a single-family residence or a condo? Once you have an idea, use our online mortgage calculator to estimate monthly payments and interest. Two of the most popular loan types are a 15- and 30-year fixed-rate mortgages.

3. Shop Around For Low Mortgage Rates

When you shop for household items or gifts, you take the time to find the best bargain. Do the same when it comes to mortgage rates. Many go for the first rate they get, assuming it will be the same elsewhere. That’s not true. To find the lowest mortgage rate, make a list of lenders to contact. Include direct lenders like First Option, along with national banks, local banks and credit unions. After you have a manageable list, try to contact them all on the same day or at least within the same 14-day period. Each potential mortgage provider runs a credit history report on the applicant. By requesting mortgage rates within the same period, they will appear as a single request rather than multiple requests, which can lower your score by a few points.

4. Don’t Let the Fees Get You Down

Don’t overlook lender fees when reviewing your rate options. For instance, perhaps you find a mortgage with a very low rate and points, yet the lender fee is high. Ask lenders upfront what the total is for all charges as a percentage of the loan amount. When you factor in the fees, you get your annual percentage amount (APR). The APR follows you for the life of the loan, so don’t ignore it.

5. Lock It In

If you are worried about rising rates, then request that your lender “lock in” the rates of your loan. Generally this can be done if the loan closes within a specific “lock period.” Before you sign anything, though, have a clear understanding of how it affects you in the future. To help secure a lower mortgage rate, wait to lock your rate till you agree to buy a home and request a shorter lock period.

6. Make a Large Down Payment

Any amount you can pay upfront for your new home is great. The larger your down payment, the less of a loan amount needed. It also signifies a lower risk to lenders. In the end, your mortgage payments will be lower.

7. Pay Extra When You Can

Whether you agree to a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM), pay more on your monthly payments when you can. Every time you do, you’re decreasing your loan period and the amount of interest you’ll pay.

Request a quote from First Option when you’re looking for a mortgage. Our experienced lenders are dedicated to honesty and to helping you find your dream home. We are here for you when you’re ready!

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