If someone decides they need a home loan, getting the best terms possible is a must. Unfortunately, the process to do so can be daunting, especially for first-time home buyers. In many cases, it is an overwhelming process that involves piles of paperwork, credit considerations, and trying to handle loose ends.
One of the main factors that go into the mortgage payment (besides the loan amount) is the interest rate. The Federal Reserve determines part of this; however, the most significant impact is where someone stands financially. There are a few different factors that must be considered. Some helpful tips to ensure the most favorable interest rate is scheduled can be found below.
Fixed- vs. Adjustable-Rate Mortgages
While some people may be hesitant to consider an adjustable-rate mortgage, or ARM, it can be a smart option for those who will pay their mortgage off quickly. During the ARM loan introductory period, the interest rate will remain lower than a fixed-rate mortgage. Just make sure to understand there will be an increase in the monthly mortgage payment once the introductory period has passed.
Put as Much Down as Possible
The bigger the down payment is the less money the lender must give the person receiving the loan and the lower the interest rate will be. The interest rate is partially based on the LTV, or loan-to-value, ratio. For example, for a home worth $200K and a loan that is given for $199K, the LTV is considered high, making it riskier for a lender. If the ratio is lower, it may be possible to get a lower interest rate.
There is no perfect credit rating for purchasing a house. While this is true, people who have a higher credit score will have demonstrated good financial habits and competency. These are the types of consumers who usually receive the lowest interest rates.
Pay for Points
Sometimes, it is possible to pay the lender to reduce the interest rate. Each one percent of the loan amount a person is willing to pay extra for can reduce the interest rate by half a percent. This essentially means that the buyer is paying the interest upfront rather than paying it over the life of the loan.
Employment History Considerations
Even if a potential home buyer has not had the same job for decades, showing there are no long periods of unemployment is proof to lenders that the person is likely to pay their mortgage, in full, each month. This type of history can help reduce the interest rate.
Prove Income Stability
If it is possible to prove the line of work is in high demand, and there is no sign it will slow down, or if someone works for a bigger, profitable company, this is a good sign for lenders. It can also provide proof that the individual will continue to have the income needed to repay the loan they the lender provides.
When it comes to purchasing a home, there are many factors to consider. Be sure to keep the information here in mind to get the best interest rate possible.