When starting the home buying process, there are many terms you’ll start seeing on paperwork. Mortgage rates are a huge part of buying a home so it’s important that you understand your options. Making sense of mortgage rates is a great way to reduce stress throughout the home buying process.
Understanding Mortgage Rates for First Time Home Buyers
What is a mortgage rate?
The most important part of a mortgage is the interest rate, which is the price you pay for using the lender’s money. When a rate is low, it can save you significant money during the life of your loan. So you might be asking yourself, what can I do to lower my rate options? Let’s take a look at these factors.
- Credit Score. The most beneficial way to lower your mortgage rate is to work on your credit score. Lenders look at your credit score to determine your creditworthiness. The higher your score, the lower the mortgage rates available to you. There are many tools online that can give you a ballpark estimate of your score, so you can see the areas where you need to improve. If you see an error (missed payment, closed card) go through the process of fixing the error as it can help lift your score.
- 20% down payment. If possible, try making a 20% down payment or greater. There are many benefits of paying a higher down payment, the most beneficial being lower mortgage rates available to you. Additionally, the more you pay upfront, the less money you have to pay over time. This reduces your monthly mortgage payment and makes it more possible to agree to a shorter-term loan.
- Pay for points. Did you know you are able to “buy down the rate?” One point generally costs 1 percent of your mortgage amount ($1,000 for every $100,000). If you have extra cash, it may be worth it to buy down points so you don’t have to pay the higher interest rate for the life of your loan.
- Consider an adjustable rate vs. fixed rate. If you can pay off your loan very quickly, an adjustable rate loan could be a good option for you. Typically, adjustable rate mortgages (ARM) have lower interest rates than conventional and FHA loans). However, it’s important to note that after the length of the ARM, you will need to refinance your rate if you haven’t finished paying off the loan, and the rate could be higher or lower than when you initially closed on the loan.
- Maintaining a steady job. By keeping a steady job for at least two years, you can improve your chances of qualifying for a lower interest rate mortgage. Try your hardest not to change jobs during the mortgage process, or it could significantly delay the closing of your loan, not to mention potentially disqualify you for the low rate. If you have to change jobs during the loan process, talk with your lender to see the best steps to take.
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