For the vast majority of people, buying a house outright without a loan isn’t possible. The only issue is that you return that mortgage loan with interest and a few percentage points can often mean many, many dollars. For instance, if you get a loan of $400,000 over 30 years at a 5% interest rate, you will have paid back a whopping $373,023 in interest alone by the time your loan matures.
Fortunately, interest rates are the lowest they’ve ever been, which could save you a significant amount in repayment money–but there are a few ways to knock the interest rate down even further. These are 5 essential questions you should ask to make sure you get the absolute lowest rate possible.
‘What is the best loan for my current situation?’
There are two broad categories: fixed and adjustable-rate mortgages. As the names imply, a fixed-rate mortgage means your interest rate doesn’t change over the term of the loan, whereas an adjustable-rate mortgage means your rate remains the same initially (for 5 to 10 years), then changes according to market indexes. Adjustable-rate mortgages often have lower interest rates than with fixed-rate mortgages. The flip-side is that once the initial period is over, those low interest rates can climb right up. Even then, an ARM might be ideal for you if for example, you know you are moving out after 5 years, and it can save you money on interest.
‘If I pay points, how much will my interest rate go down?”
Points are a “prepaid finance charge to reduce interest rates. Let’s say you got a 30-year fixed-rate mortgage of $400,000 at a 5% rate. You would be paying back $2147 a month. If you then decided to pay a point, your interest rate would go down by 0.25% to 4.75%; two points would bring it down to 4.5% etc. That reduces your monthly payments to $2027 a month. Remember that these points are paid for upfront, so that 0.5% decrease will cost you about $8000.
If you will be living in that house over the full term and beyond, then the point system might benefit you because you can recoup the cost over time with the lower interest rate. In our example, you would make your money back after 6 years and can just enjoy the lower monthly payments.
“What special loans with lower rates do I qualify for?”
Certain situations can get you a lower interest rate and significant savings over time. A common example is the Veterans Affairs (VA) loans available to all past and present military personnel, allowing them to purchase houses with low-, or even no-down payments. First-time buyers also benefit from lower rates through FHA initiatives. If your income is low, you might qualify for HUD loans, which offer low rates. These low-rate loans aren’t only available to those with financial struggles–special loans are available for doctors, nurses, teachers etc.
‘Will you show me how to increase my credit score?’
Paying off your debt and paying all your bills on time help to build up your credit score–a figure that shows lenders how responsible you are with credit. The aim is to maintain the highest score possible as your mortgage interest rate is influenced by it.
Previously, a lower score could have prevented you from being approved for a loan, but today, you might get the loan albeit with a higher interest rate. To avoid higher rates altogether, make sure you speak to your lender about how to handle issues that show up on your credit report.
“A willing officer could help you save thousands of dollars”, Fleming explains. Remember that it takes time to improve a low score–often 30-60 days or longer, depending on the circumstance–so let your lender know what questions or concerns you have upfront.
“When do I need to lock down my interest rate?”
Similar to the stock market, mortgage interest rates tend to change based on market indexes. However, loan officers can avoid uncertainty by “locking in” a particular rate for a period of time–usually 30 to 90 days. That way, you have time to close the deal on your house without having to worry about your interest rate going up.
The trick here is knowing when exactly to lock it in. You need to be mindful of whether interest rates are trending upwards, or downwards–make sure your lender fills you in on this–and balance that with the stage of the home-buying process you are at. There’s a chance that you might lock it in too early and it runs out before you even close your house.
The industry norm is to lock in a rate once you’ve found the house that takes your breath away. 90 days is enough time to close on the house without having to worry about fluctuating rates.
Ready to ask these 5 questions right now, and learn what rates you might qualify for? Click Here