Getting the best interest rate on your home loan

It’s remarkable the impact that the interest rate can have on your purchasing power when you’re buying a new home. If, for example, you have a budget of $2,000 a month for your mortgage, how much home can you afford?

Here’s what the numbers would have looked like (assuming you were putting 20 percent down and taking a 30-year fixed rate loan at a fixed rate of 5.25).

Loan amount: $362,000.

House budget: $452,500.

Let’s compare that to what the same $2,000 a month would buy you today*.

Fixed interest rate: 3.99

Loan amount: $417,000.

House budget: $521,000.

That’s a difference of $68,500 in the house budget. Which begs the question: How do you get the best interest rate? Here are some quick tips for stretching your dollar, courtesy of Rick Scherer of MSA Mortgage.

Keep your credit score high. Lenders want to see that you have a proven history of borrowing and repaying money responsibly. If you’re thinking of buying a home in the future, pay careful attention to your credit. Even small differences in your credit score can significantly impact the interest rate you get for your home loan. Your credit score is influenced by five factors, each of which is weighted differently.

  1. Payment history: 35 of the score’s weight
  2. Amounts owed: 30 of the score’s weight
  3. Length of credit history: 15 of the score’s weight
  4. New credit inquiries: 10 of the score’s weight
  5. Type of credit used: 10 of the score’s weight

There are many steps you can take to improve your credit score.

Try to keep the balances of your revolving debt around 30 percent or less of the available balance.If you tend to carry a balance, spread your balance around to a few cards. When the balance is near the limit, credit agencies viewed you as being over extended and may reduce your credit score.

Avoid applying for multiple credit cards at a time. Studies show that when people apply for many credit cards in a small amount of time, there is a greater risk of default. This causes credit bureaus to lower your credit score. 

Don’t close credit card accounts. This can affect your credit score. If you really want to close an account, it’s best to wait until you close on your new home.

Check your credit a few times a year. You can receive a free credit report once a year from each of the three credit reporting agencies (Equifax, Experian, and Transunion). It’s prudent to check with one of them every four months so you always know what’s being reported about you. (Note: Checking your own credit doesn’t count as an inquiry that would affect your credit score.) If you find errors in your credit report, send a written notification to the credit bureau requesting that they remedy it.

Shop around. When it’s time to buy a home, talk with a few lenders to make sure you’re getting the best rate. You can also get a loan through a mortgage banker or broker, who’ll have access to several loan options. You’ll want to know about:

  • Interest rate: Is it fixed or adjustable?
  • Points: Fees paid to the lender or broker for the loan or a lower rate
  • Fees, such as loan origination fees, broker fees, and closing costs
  • Down payments: Many lenders require 20 percent of the home’s purchase price as a down payment, although some Mass Housing, FHA, or Fannie Mae programs have smaller down payment requirements.
  • Private mortgage insurance (PMI): Insurance that protects the lender in case the home buyers fails to pay

Note:If you’re shopping for a mortgage, each lender will be checking your credit. Be sure they do so within a two-week window. This way, all of the inquiries within those two weeks will only represent one credit inquiry. Even better, once the first lender pulls your credit report, let the others know your credit score when quoting you a rate.

Lock in your rate. Once you’ve settled on the terms of your loan, lock in your rate to protect against interest rate increases while you await final loan approval. Your lender should provide you with a letter outlining the agreed upon rate, the time period you can lock the rate in for, and any fees you’re being charged to lock in the rate.

Avoid sudden changes. Be careful of major changes before you close on your new home. For example, if you’re anticipating changes in employment, talk with your loan officer to see what impact this may have. Likewise, if you need to make major purchases such as a new car, check to see how this may influence your loan qualifications. Also, if you make large bank deposits that exceed your recent account history, your lender may want a written explanation of the source of the funds. Your lender will pull your credit again five days prior to closing and if you took out new credit during the transaction, this could potentially delay your closing or impact your approval or rate. Talk with your loan officer about this up front to avoid any obstacles during the process.  

For more tips on getting the best interest rate, download “Looking for the Best Mortgage,” from the US Department of Housing & Urban Development

Have a real estate question? Contact Kyle Mann to learn more about buying or selling your home in the Boston suburbs. Kyle is a Realtor with Gibson Sotheby’s International Realty.

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