From understanding debt to income ratios to adjustable rate mortgages, there is a lot to know about home financing in Washington state, and finding the right home financing for you can feel overwhelming. One of the most significant factors in home financing is the interest rate of your home loan. Interest rates are on the rise, but there are steps that you can take to qualify for lower your interest rate before closing on your home loan. We’ve put together our eight best tips for getting a lower interest rate, read on to learn more.
1. Improve your credit score
When you’re getting ready to begin the home purchasing process, make sure your credit score is as high as it can be. Check your credit score frequently to stay in the know and make any corrections if need be. There are three credit bureaus that you can use to find your FICO credit score; those are Experian, TransUnion, and Equifax. There are many websites that you can use to get updates on your credit for free.
Even if your credit score meets the minimum requirement for your desired loan program, we recommend doing your best to increase it because your credit score is a valuable factor in determining your mortgage interest rate. You can build your credit by paying down any balances that you have on your current credit cards and by not opening any other lines of credit or loans. Improving your credit score is something that takes time so make sure you factor that into your timeline before applying for home financing if you need to.
2. Pay down any debts
Before applying for a home loan try to pay down any debt you may have on student loans, car payments, or credit card debt, etc. This will improve your debt to income ratio which could show lenders that you are a lower risk of paying back what you borrowed. Lower risk could mean a lower interest rate.
3. Save for a bigger down payment
You can get a lower interest rate for a home loan if you borrow less money. To do this, you will need to offer a larger down payment. Even if the loan program you plan on using requires a down payment minimum of 3%, make sure you can put down more. By borrowing less, you are decreasing your loan to value ratio. Your loan to value ratio is the percentage of the total home’s cost that you are borrowing. For instance, if you put down a 20% down payment you would need to borrow the remaining 80% of the home price, which would be your loan to value ratio. The lower your loan to value ratio, the lower risk you are to a lender so they may be able to offer you a lower interest rate.
There are many online tools out there that you can use to put together a budget and savings plan to help you boost your down payment amount. You can also use gift funds from a family member to supplement your down payment, making your contribution even larger. Taking the time to save up could pay off!
4. Consider a shorter term for your home loan
Traditionally home loans are paid off over the course of 30 years. If you are able to pay off your home loan in less time you may be able to qualify for a lower interest rate.
5. Research different loan programs and products in Washington state
There are many different home loan types to suit your situation. Do your research and work with a Loan Officer to determine the best loan product for you. Different loan types could offer different interest rates. For instance, with an FHA home loan you can most likely expect a lower interest rate than with a Conventional home loan so you can plan on keeping more money in your pocket each month.
There is another loan program called an Adjustable Rate Mortgage or ARM that can offer a lower interest rate as well. Unlike the traditional fixed rate home loan, with an ARM the interest rate can fluctuate throughout the term of the loan. Typically, the initial rate is fixed for the first five or seven years of the life of the loan and then the rate can vary up or down by a predetermined percentage rate. An ARM could be beneficial if you plan on living in the home for five to seven years or for the initial time period of the loan. Contact us today to see what home loan program would work best for you.
6. Shop around for different lenders
Purchasing a home is one of the most impactful investments that you can make in your life, so like any large purchases, you should feel free to shop around to different lenders to make sure you are getting the best interest rate for you. Apply for home financing with different lenders, but make sure to do it quickly. With each application, your credit will be checked which will cause a dip in your credit score. However, you have a 30 day grace period where you can apply for home financing with multiple lenders and not damage your credit score. At Sammamish Mortgage, you can rest assured that we will find you the best mortgage rates possible.
7. Lock in your interest rate
Interest rates are constantly changing. However you can work with your lender to lock in your interest rate for a certain amount of time while you shop for your home. This way you will know what to expect for your monthly mortgage payments when you put in an offer on a home.
8. Buy down interest rates
If you’re willing to go the extra mile to lower your interest rate you can buy down your interest rate. Buying down your interest rate is also known as buying mortgage points or discount points which are a cost paid to your lender at closing for a reduced interest rate. One mortgage point is equal to about 1% of the amount you are borrowing. For example, if you are borrowing $200,000, one point is $2,000. One point can bring down your interest rate .25%. Buying down your interest rate could save you a lot of money over time and could be a good option if you are planning on living in your home for at least five years. Our local experts can work with you to see if you would benefit from this option.
Ready to talk rates?
Our local experts at Sammamish Mortgage are ready to help you assess your financial picture and get you the lowest interest rate possible. Apply now to get started!