For most people, a home loan is the largest purchase they will make. If you go the traditional route, you’ll be making a fixed payment, including both principal and interest, for the next 30 years of your life. The lower your interest rate, the better, as interest on a $250,000 house at a rate of 3.75 percent will cost you more than $165,000 in interest. Lowering your interest even slightly can save you thousands over the course of your loan.
Here are five ways you can help get the best rate for your home loan.
Improve your credit score. Since credit is one of the biggest impactors of home loan interest rates, you want to make sure yours is in excellent condition. Before applying for your loan, run a credit check on yourself to see where you’re at. Ways to improve your credit score include paying off old debts, disputing any errors, paying all of your bills on time, keeping your credit card balances low or paid off each month, avoiding any new credit card applications and being patient. It can take years to improve your credit, so consider postponing the purchase of your home while you wait.
Save up for a large down payment. Nowadays, even getting approved for a loan is tough, much less qualifying for the best interest rate. To help your chances of getting approved, especially for those that are self-employed, plan on having a large down payment of at least 20 percent, preferably more. A large down payment also greatly reduces the size of your loan, meaning you’ll pay significantly less interest over the course of the loan.
Comparison shop. Some banks offer discounts to customers they have a good relationship with, so check with your bank first and then comparison shop a variety of banks, credit unions and lenders in your area to see who can offer you the best rate. In order to not have your credit score negatively impacted from all of the inquiries, do all of your comparison shopping within a two week time frame.
Pay for points. You can pay to have your interest rate lowered. Typically, paying 1 percent of the loan out of pocket will lower your interest rate by 0.125 percent. Pull out a lender calculator, such as the one offered on Newcastle Permanent mortgages, to see if the money you’ll save on interest is worth it in the long run. Make sure to take into account how long you plan on living in the home.
Look at what interest rates are currently at. A variety of factors affect the interest rate of home loans, including how many people are buying homes, inflation and actions of the US Federal Reserve Bank. If rates are sitting at around 6 percent, you’re not going to find a lender who will give you 4 percent. If you cannot afford your monthly payment taking into account current interest rates, you’ll want to either purchase a less expensive home or perhaps delay purchasing a home for the time being.
Purchasing a home should always be well thought out, calculated move that provides you with both a home you love at a price you can afford. Look at the whole package – including your loan amount, interest rate and terms of the loan before deciding whether or not now is the time for you.
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