As a first time buyer, you have a number of things to think about, from deciding whether to work with mortgage brokers or directly with the lender to making sure you have a large enough down payment. There is one other thing you should think about, and that’s the interest rate you’ll pay on the loan. Interest is part of the monthly payment you make on a mortgage. A higher rate means a higher monthly payment, and in turn, a less expensive home. While rates are set by the market, they do vary somewhat. There are a few ways you can get the best possible rate on your loan.
Comparing rates
Part of the home-buying process is getting prequalified for a mortgage. As a first time buyer, prequalification will give you an idea of the amount of loan a lender is willing to give you, based on your credit history, income and the amount of debt you have. When you get prequalified, the lender will also give you an idea of the interest rate you’re likely to get. You can use this information and a mortgage calculator to figure out how much the rate will affect the monthly payment.
For example, if you were able to spend $800 per month and take out a 30-year loan with a 4 percent rate, you could borrow up to $167,570. When the rate increases by just one percent, the amount you can borrow to keep payments at $800 per month drops to $149,025.
What affects rates
Several factors affect the interest rate you are offered on a loan, including your credit score and the lender you work with. In some cases, mortgage brokers can help you contact with a number of lenders and banks and can help you with comparison shopping. If you do work with a broker, it’s still a good idea to do some comparison shopping on your own, to make sure you’re really getting the best interest rate possible. In many instances, you can get the best rate by working directly with the lender.
Having excellent credit means getting the best possible rate, too. According to U.S. News and World Report, having a low score (below 639) can mean your interest rate could be 1.5 times higher than that of someone with an excellent credit score (above 760).
Before you start looking for a home or getting prequalified, make sure your credit is in order and that you have the best score possible. Once you do start looking for mortgages, remember to shop around, and don’t take the first offer that comes your way.
Image source: Flickr
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