Finding the best mortgage rate is one of the most important things that any first-time home buyer can do in order to save money. Rates can vary dramatically, and jumping in with the first option that comes down the pike isn’t going to do you any favors. More often than not, getting the best possible mortgage rate is a time-consuming process of trial and error, and it doesn’t happen overnight. There are plenty of things that you can do, though, to find a rate that will not only make it easier for you to afford a mortgage, but will be better than any other offered in your state.
Clean up your credit
If there’s one thing that you should do before you even consider looking for a mortgage, it’s to clean up your credit. This is exceptionally important, as no lender is going to give a great mortgage rate to someone whose credit is full of blemishes. For those who don’t have the credit financial history, it can take a long time to recover. This is especially true for anyone who has done bankruptcy, which can put a hold on your ability to get a mortgage for years. Still, there’s no better time than now to start working with a credit specialist if you’re interested in getting a mortgage. There are many agencies that provide free credit counseling, which is ideal for those who are sticking to a tight budget and can’t afford to hire anyone. The sooner you get started, the sooner you’ll be able to find a great rate.
Create a Budget
One of first things to consider when looking for the best rate is figuring out your limit. Decide on the maximum rate by creating a budget in order to figure out how much you can afford.
The lender should be able to compare loan terms with conventional methods of financing so you can make an informed decision on which loan terms best suits you. You want to jump on the best rate, which mostly involves good timing. The rate lock is a contract with the lender that guarantees you a prevailing interest rate.
You must also agree to buy the loan at that rate within a specific time period, usually in 60 days. If the rate rises, you’re covered. Use a mortgage calculator to compute the monthly payment at different interest rates. If you find a rate that is around or below your limit, lock into that rate at that time or bow out of the game.
When rates do dip below your maximum limit, be as prepared as possible — clear away any obstacles if they arise so you don’t miss out. Some lenders may offer you the chance to get a lower rate if you’ve already been locked in. This is called a “float down,” which means the prevailing rates drop, even after you have secured a lower rate. Be mindful that these specific contracts vary.
Shop financial institutions
Once your credit score is in good shape, it’s time to shop as many financial institutions as you can.
Don’t just check out one lender when shopping around for a good mortgage rate. Since interest rates go up and down constantly, different lenders may offer different products. Some may offer the best mortgage rates for homebuyers, but not for those who want to refinance.
Shopping different lenders will allow you to come up with a good idea of how much rates can differ, and is a great way to better inform your decision. It’s also a lot of work, though, so be sure you give yourself the time to look around. If you’re in a major rush, you’ll most likely end up getting a rate far higher than you’d be able to find with the right amount of lead time.
It’s best to try a mix of institutions from a direct lender, credit union or a community bank. After deciding on which lender, inquire about fees associated with the loan. A mortgage at a lower rate may end up costing you more because of the fees that add up in the end. Some lenders combine all of their fees into what’s called a loan preparation fee and others separate them out, so it’s important to ask for the total amount it will cost to close out the loan.
Once everything is squared away, decide when you want to close. Discuss your intended target date with the lender and ask about the charges for loan lock periods. You want to lock in the best rate for the right length of time.
When dealing with a lender and filling out a loan application, it’s imperative that you remain as transparent as possible. Trying to hide certain flaws isn’t going to get you anywhere, and the lender will be far more likely to offer you a good mortgage rate if you’re honest and up-front from the very beginning. You don’t need to provide information that might not end up getting utilized, but you should never try to skirt around a situation, despite the outcome. In most cases, this type of approach ends up causing more harm than good.
Offer a large down payment
Sometimes, the best way to ensure that you’re getting a low mortgage rate is to offer a large down payment on the home. Many people who are on a tight budget find this difficult, but if you can save enough money for a large down payment, you’ll be in a much better spot to negotiate. After all, you’re trying to appeal to lenders as much as possible, and the best way to do so is by putting as much money on the table without jeopardizing your financial situation. If possible, try to solicit contributions from friends and family members. So long as you’re good with paying people back, doing so can be a major help in getting you the best rate possible.
Erik is a staff writer for MyBankTracker.com, who specializes in real estate, consumer banking and personal finance.