by The Ascent Staff | Dec. 3, 2020
Buying a home is the biggest purchase most people will make. And if you aren't aware of the financing options available, it could wind up costing you far more than you'd expect.
Controlling your homeownership costs begins with your mortgage and the interest rate attached to that mortgage. The lower you can push your mortgage rate, the less money you'll pay over the life of the loan.
Here are 10 ways you may be able to lower your mortgage rate.
The foundation of a low mortgage rate begins with keeping your credit score as high as possible. Lenders look at your credit score as a roadmap to your creditworthiness. A high score proves you're likely to repay your loan. And a low score means you're a riskier bet -- which means higher interest charges for you.
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On top of a good credit score, mortgage lenders also want to see a consistent and long-tenured work history. If you've been working at the same place for many years and have consistent or growing annual income, lenders will be more likely to give you a home loan with an attractive rate.
Conversely, if you've changed jobs multiple times recently, lenders may be more leery of giving you a big loan because your income isn't as reliable. Banks and credit unions will verify your employment status before you make an offer on a home and before the closing date of a home purchase. If you've changed jobs or quit during the closing process, it could jeopardize your ability to get a home loan.
One of the smartest moves you can make: rate shop for the best mortgage. It's pretty easy to compare mortgage rates online. Take some time to compare online banks against national banks and local credit unions.
Credit unions are an especially good place to shop around. This is because they tend to have lower fees than traditional banks -- and they pass some of these savings on to their members. Credit unions may also be more willing to work with consumers who have less-than-stellar credit profiles.
How's this for groundbreaking advice: Ask your bank to lower your rate. The worst-case scenario? They say "no."
If you have an exceptional credit score, ask your lender to match a competitor's interest rate. You can also simply request a lower interest rate based on your exceptional credit history. Lenders want the business of people with excellent credit scores. They'll sometimes go to bat (so to speak) in order to get the business of high-credit borrowers.
Fifth, take into consideration how much money you plan to put down on your home purchase. Home loans in excess of $417,000 are classified as "jumbo loans," and are perceived to carry more risk for the bank. These usually carry a higher interest rate, too.
Consumers may benefit by putting enough money down to lower a home loan out of the jumbo loan category. This strategy could save you thousands of dollars over the life of your loan.
Be careful, though: Very small home loans also have high interest rates. Try to keep your loan amount above $100,000 to hit the "sweet spot" of mortgage interest rates.
Financial institutions like it when homebuyers repay loans quickly. Try taking out a 10-year or 15-year mortgage for a lower mortgage rate. In fact, any loan with a term shorter than 30 years should lower the interest rate you'll pay.
Another consideration homebuyers can make to lower their mortgage interest rate is adjustable-rate vs. fixed-rate mortgages. Adjustable-rate mortgages typically offer a lower rate for the first five or seven years. If you have the ability to pay off your home loan very quickly, an adjustable-rate mortgage may be worth considering.
Be careful, though. Adjustable-rate mortgages adjust higher once this time frame has ended. For consumers who are unprepared, or in instances where a large shift has occurred in interest rates over a five- or seven-year time frame, homebuyers could see a crippling increase in their monthly mortgage payment.
On the other hand, fixed-rate mortgages leave nothing to chance. You know what you're getting upfront. This trade-off is something homeowners should consider.
Mortgage points are an upfront fee paid by homebuyers to lower their mortgage rates. Each point is equal to 1% of the value of the loan, and paying a point typically lowers your ongoing interest rate by 0.125%. For instance, paying a point on a $250,000 loan would cost an extra $2,500, but it would reduce your interest rate by 0.125% over the life of the loan.
Points can save you money if you're going to remain in your home for a long time. Reducing your mortgage rate will save money over a 15- or 30-year time frame.
Sometimes, the simplest things can save you money. Some lenders offer a lower interest rate for customers who set up an automatic mortgage payment. Just keep in mind that, if you close your account or change banks, your original lending bank could remove the interest rate discount applied for setting up an automatic mortgage payment.
Finally, current homeowners looking to lower their monthly mortgages should strongly consider refinancing their existing mortgages.
Homeowners should be following all of the aforementioned suggestions -- especially shopping around for the best rates -- when looking to refinance. Use a mortgage calculator to decide whether refinancing, including refinancing fees, is really worthwhile.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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