It’s worthwhile to put some effort into finding an attractive mortgage rate. Since the sum being borrowed is huge, overpaying by a small fraction of a percentage may add thousands to the total interest paid over the life of the loan. The spread between the best and worst loans can be half a percent or more, and even the difference between a good and great rate can have a large impact. Clearly, home purchasers can’t afford to be complacent about securing the best options possible. Here are a few tips on getting your most favorable deal.
Watch your credit.
One way banks measure the risk of loaning money to a client is by reviewing their credit score. Lenders use a specific credit formula to come up with a client’s score. A lower credit score equals greater risk to the banks, for which they charge a higher interest rate. The primary drivers of credit scores are the history of making payments (35%), how much debt is owed relative to credit lines available (30%), and the length of credit history (15%). Consistency and timeliness in paying obligations, even small bills, count toward the overall score as well. For example, when people miss a summer phone bill that hadn’t arrived before vacation ended, this missed payment often arises as a nasty surprise during loan applications. Cleaning up these dings and maintaining low levels of debt are essential parts of raising credit scores and getting the right mortgage rate.
Make a hefty down payment.
Another thing that causes higher rates is borrowing more than 75–80% of the value of the house. As with a raised credit score, the banks are concerned with the loan’s associated risk. Without a buffer, should something go wrong (and the bank needs to foreclose), banks have less security, and they therefore charge extra interest to make up for an increased risk.
Alternatively, the lender may add a monthly fee for private mortgage insurance (PMI) which covers the bank should the borrower stop paying their loan (you pay the premium; the bank gets insured). When possible, borrowers should put down at least 20% of the purchase price, as it can help them access the best available rates.
Shop around, with help.
It’s amazing how people will shop around to get a deal on an outfit or airline ticket but may accept the first mortgage quote they get their hands on. Rates are always shifting as the banks’ appetites and pricing for different loan types change. Doing comparison research on loans can bring potential annual savings worth thousands of dollars—a lot more than the discount on a suit! This bargain hunting is where mortgage brokers can shine, since they keep their fingers on the pulses of many lenders. Good brokers also help with credit issues and help borrowers navigate the tedious approval process, leading to smoother transactions. Banks cover the brokers’ fees, and Consumer Reports magazine confirms that using a devoted expert may be both more convenient and less expensive than going it alone.
Research programs for first-timers
Finally, one thing brokers don’t typically provide access to is discount mortgage programs which banks may offer for first-time home-buyers. These loans provide bargain interest rates and are generally available only in conjunction with a not-for-profit that takes responsibility to provide financial counseling to the borrowers. The challenge however is, that the requirements are often so narrow that the loans become impractical.
For example, one first time owner program recently was limited to borrowers with incomes below $62,000. Even with the discounted rate, an income that low doesn’t support the purchase of even a small house in most frum areas. Still it’s definitely worth having a conversation with banks and local social service organisations to see what’s on offer for first-timers. Lakewood’s LRRC for example has helped hundreds of families save large sums by connecting them with these bargain mortgages. As in all matters financial: you need to do your homework!
Want to dig deeper?
Try these related articles
Getting A Great Deal When Buying A Home