Interest rates may be higher today than the rates we grew accustomed to over the last few years. But that shouldn’t stop you from buying a home! Today’s rates are still lower than the historical average, meaning that you’re still getting a good deal.
But that shouldn’t stop you from buying a home! Today’s rates are still lower than the historical average, meaning that you’re still getting a good deal.
And today, the experts here at Sequoia Real Estate have seven tricks to help you get a lower interest rate on your home loan!
1. Boost Your Credit Score
Your credit score plays an important part in your mortgage loan. Not only does your credit score determine if you qualify for a home loan, but it also determines how good an interest rate you can get. A higher credit score indicates a lower risk for the lender, so they are willing to offer you a lower interest rate.
There are lots of ways to quickly boost your credit score, including:
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Paying down credit card balances,
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Paying off past-due debt, and
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Making all payments on time.
2. Shop Multiple Lenders
Each lender can charge a different interest rate. The lenders decide how much interest they need to receive to make the risk of lending money worth it. Lenders refer to the interest rates published by the Federal Reserve, but they typically add to this rate to pad their earnings and insulate themselves a bit from possible losses.
This is why you should get quotes from multiple lenders. Some may offer better rates than others. You may want to consider working with a mortgage broker, whose job is to help you find a suitable lender for your unique situation.
3. Choose the Right Loan Type
Different loan types come with different interest rates. VA loans, for example, are backed by the US Department of Veteran Affairs, so this loan type typically comes with a favorable interest rate. However, this loan type is only available to veterans, military service members, and their spouses. Non-veteran buyers with good credit typically find the lowest interest rates with conventional loans. Buyers with fair credit might get a better rate from an FHA loan.
4. Make a Larger Downpayment
Increasing the amount of your downpayment means that you will hold more equity in your home. This means that the lender is taking on less risk because you are borrowing a smaller percentage of the home’s value.
If you are in a position to increase your downpayment up to the next five percentage point mark (going from 5% to 10%, for example, or 10% to 15%), your lender might give you a lower interest rate. This upfront investment will save you money over the long term by reducing your mortgage payments and your total interest expense.
5. Buy Mortgage Points
Mortgage points allow you to buy down your interest rate by paying an upfront fee.
Generally, paying a fee equal to 1% of your loan will reduce your interest rate by a quarter of a percent. So, for example, if you are borrowing $400,000 at 6%, you might pay $40,000 to get a rate of 5.75% instead.
It’s important to run the numbers before buying mortgage points. Points are only worth buying if you plan to own the home for several years, under the original mortgage loan. If you sell or refinance before you see enough savings to cover your upfront investment, you would have been better off paying the higher rate.
6. Opt for a Shorter Loan Term
Shorter loan terms represent lower risk for lenders because they will recoup their investment faster. So they might be willing to offer a lower interest rate on a shorter loan term. Instead of taking a 30-year home loan, for example, ask your lender if they offer a 20 or 25-year option.
Just remember, reducing your loan term will increase your mortgage payments because there will be fewer total payments to spread the loan balance over. Make sure you’re comfortable with the higher mortgage payments before going this route.
7. Consider an ARM
Adjustable-rate mortgages (ARMs) are an alternative to fixed-rate mortgages. With a fixed-rate mortgage, your interest rate remains the same throughout the entire loan term. But with an ARM, you’ll get a few years at your starting mortgage rate, then the rate will fluctuate with the market. So if interest rates go up, your rate goes up, and if they go down, your rate goes down.
Lenders are willing to offer lower starting rates to borrowers who choose an ARM because the borrower is accepting the risk that rates may rise. Of course, if rates go down, the borrower gets the added benefit of the automatic rate reduction.
We are Here to Help!
Whether you are ready to find your dream home now, or you just want to discuss your options with a qualified buyer’s agent, contact Sequoia Real Estate for a free, no-pressure consultation!
