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When looking to purchase a home through financing, you may be interested in finding ways to lower your mortgage rate. By scoring a lower interest rate on your mortgage, you can potentially save a lot more for other things like renovations or even a family trip. Here are 7 ways you can reduce the rate when signing the mortgage policy and through the course of the loan.
1. Shop Around
It is recommended that you talk to multiple lenders before settling on one. Potential lenders can include mortgage bankers, local credit unions, regional banks, or national banks. Keep in mind that every lender offers their own rates, fees, and loan terms. And while some focus more on new homeowners, others cater to individuals looking for refinancing loans.
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When comparing your options, you need to take into account the complexities of your financial situation to ensure that you are making the right decision. In addition, it is important that you do your own research and not just go with any recommendations made by your real estate agent. Doing some research will help you to find the best deal that meets your specific needs without becoming a financial headache later on.
Also, you should note that loan rates are subject to unexpected fluctuations. This is why it is advisable that you make the comparison on the same day. Ideally, contact the different lenders at around the same time to get more reliable comparable data to help you make a more informed decision. Also, don’t forget to take into account all potential fees when determining potential fees.
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2. Improve Your Credit Score
The higher your credit score, the more your chances of scoring a better mortgage. A high credit score gives you access to lower mortgage rates with lower monthly payments. A low credit score is a clear red flag to lenders, and most won’t qualify you if your credit score is poor. Basically, the lower your score, the more of a risk you are considered to be.
With a healthy credit score, you are more likely to get a low-interest rate. However, having debt shouldn’t deter you from working to improve your credit score to allow you to qualify for a mortgage loan with a better rate. Review your credit report checking for any outstanding debts you must settle. Clear them or make plans to settle them on time every month.
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Your next step should be to find and correct any errors in your credit report since they can negatively affect your credit score. But you should note that there are lenders who will qualify you even if you have a low credit score, however, you should be prepared to pay a higher rate on your mortgage.
3. Pick the Loan Term Strategically
If what you want is an option with less risk and a lower mortgage rate, consider going for a short-term loan. However, you should note that these loans have significantly higher monthly payments to ensure you pay off the principal amount within a short period of time. With longer loan terms, you spread the payments over an extended period of time, allowing you to make much lower payments but with higher interest rates.
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If you are financially constrained and are looking for a way to save more money, you should go for a short-term loan. However, if you have a more disposable monthly income, you are best going for a long-term loan.
4. Make A Bigger Down Payment
When taking out a mortgage loan, the more money you put down, the less you will have to pay. Putting down a significant amount gives you more equity on your property. This means you get to repay a lesser principal and pay less interest over the life of the loan. Keep in mind that your interest is determined based on what you owe, or the principal.
If you want a lower mortgage rate and lower overall monthly payments, seek out a loan that allows you to pay more on the down payment. On the other hand, the lower the amount you put down, the higher the risk; thus, the higher the amount you will be charged in interest.
5. Purchase Mortgage Points
If you are planning on owning the home for an extended period, it is wise to consider buying mortgage points. This allows you to save money since every mortgage point you buy at closing is usually 1% of the mortgage. You get to enjoy a lower interest rate in exchange for the upfront payments, while also reducing your monthly payments.
But remember, it will take time to recoup your savings. This is called the break-even point – the amount of time (months) it takes for your savings to add to the point’s value. So, as you can see, mortgage points may not be ideal if the time it will take to recoup your savings is longer than the period you plan on owning the property.
6. Mortgage Rate Locks
A smart way of minimizing the impact that any mortgage rate fluctuations may have before closing your loan is to lock in the interest rate. This strategy protects you against increased rates, however, you will need to pay a fee to lock in the rate on your mortgage. This option is ideal if you believe that there is a chance of the rates changing.
However, you should keep in mind that locking your interest rate means that you don’t get to enjoy any drops in interest rates, same way you aren’t affected by higher interest rates. But you can talk to your lender about locking in the rates with a float-down provision. This gives you a one-off opportunity to reduce the locked rate to prevailing market rates. Keep in mind that this option also attracts a fee.
7. Refinance Your Mortgage
Refinancing is much more like renegotiating the mortgage terms. This option can potentially save you money over the course of the loan. Different lenders provide different refinancing options, each with its perks and downsides. Regardless, knowing which refinancing options to choose will help to save you money on the mortgage rates.
In case you have an ARM (adjustable-rate mortgage) and are worried about a potential increase, you can choose to refinance it to a fixed-rate mortgage. This allows you to make regular monthly principal payments as you pay the interest payments. You also have the option to refinance the ARM to another ARM but with different terms. The FRB (federal reserve board) advises going for ARMs with low-interest mortgage rate caps. This helps to ensure that the mortgage payments don’t increase beyond a specific amount.
Also, if you obtained a fixed-rate mortgage and your financial situation has since improved as well as your credit score, you can renegotiate it to a lower interest rate. This strategy is also ideal if the mortgage rate decreases. You can renegotiate the tenure of the loan to match your financial situation when refinancing the FRM.