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Home Loans: Shopping for a Low Interest Rate

Home Loans: Shopping for a Low Interest Rate

Today we are excited to have Morgan Sims as our guest blogger.  Morgan is an accomplished writer who has been featured on many blogs with topics ranging from Real Estate to Social Media. – The KCM Crew

Luxury Home

Buying a home is likely the biggest purchase you will make, and even more likely a purchase that will require a loan. When dealing with a financial commitment such as this, understanding how to get the lowest possible interest rate could mean a difference of thousands of dollars. Home loans are a complicated business, so here are a few tips to help you shop for the lowest interest rate.

Qualifying for the Lowest Rates

Computer models fix a large percentage of the costs of a home loan with strict prequalification.  Loan officers are not able to give every client that walks in the door the same deal.  It is a good idea to be aware of your own credit score and equity, while also comparing rates in your local market, so you know what to expect.

For the best interest rates you’ll likely need a credit score of at least 740 and have 20 percent equity. These figures are a general guide and are always changing.  However, if your score is considerably lower than this and you have low equity, be prepared for heavily increased rates compared to the best that are offered.

Be Prepared

The best thing you can do for yourself to make the loan process easier is to plan ahead and be prepared.  Be sure to gather all the necessary documents before you begin; to ensure timeliness and organization.  You should also prepare for the down payment by saving up monthly.  Depending on the lender and type of loan, you may be required to put anywhere from 2.25% to 20% of the purchase price down.  In addition, keep in mind the estimated closing costs, as many tend to forget to budget for these fees.  It’s never too late to start saving.

Another factor to consider is home insurance costs.  If insurance costs for your area are particularly low, it may free up some additional cash for loan repayments.  Tools like the home insurance calculator allow you to plug in all of your information to get an estimated cost for your home insurance.

Understand your Needs

Before going to speak to anyone about getting a home loan, be sure you are clear about what it is that you’re looking for and what parameters you have set.  If for any reason they can’t be met, be cautious of alternative offers that are suggested to you, as you may be persuaded down a different path.  

Looking Will Lead to the Right Rate

There’s no easy way around it if you want to find the lowest interest rates on a home loan.  You have to spend a long time looking, and you need a strategy.  It may not be something you’re particularly interested in but if it saves you a large sum of money, it’s worth it.

You must compare similar policies; otherwise you’re wasting your time, as a sensible comparison is almost impossible.  Consider the closing costs, interest rate, and lock period to ensure that they are comparable offers.

Move Quickly

As they say, time is money. Be sure to respond promptly to your lender if they require any additional information from you so you can keep the process moving.

If you’ve managed to find a great deal on your home loan, waiting around for ages while you try to better it or find the equity required to close the deal, is likely to end up costing you. Shopping around is certainly in your best interest. However with today’s market on the rise, rates are not likely to stay stagnant. So if you find a great rate that fits your needs don’t wait long to close it.

Also look into getting prequalified for a loan. This process is rather simple and can put you in a much better place to buy, as well as give you a great idea as to what you can expect to borrow.

Taking out a home loan is one of the biggest financial commitments you are likely ever going to make.  Make sure you put in the time to do your research and look around for the best possible deal.

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3 replies
  1. Patrick Wright
    Patrick Wright says:

    Many of your points are right on target in terms of credit and equity contributing the most to rates available to prospective borrowers. However, your advice on how to compare rates among lenders needs a bit of revision.

    The generic term “closing costs” encompasses many fees not actually charged by the lender. As an industry, we’re tasked with making our best estimate of those fees charges by other parties (e.g., attorneys, title insurance companies, home owners’ insurance companies, local and state governments, etc.). Therefore, borrowers should not actually consider those fees when comparing lenders. Some of us (myself included) will use conservative estimates to quote fees higher than we anticipate so that the borrower will be prepared for a worst-case scenario. Others will greatly underestimate the fees in hopes of winning business from unwary shoppers.

    However, borrowers should compare fees actually charged by the lender (e.g., underwriting fee, origination fee, processing fee, or other similarly named items) and any points charged for a particular rate. They should also ask probing questions about these fees and get the “fine print” on offers of zero closing costs and the particulars involved in acquiring the benefit.

    Your advice should also warn borrowers that interest rates will change not only from day to day, but also from hour to hour. Mortgage interest rates are tied to the trading of mortgage-backed securities (MBSs) on the stock market. Therefore, if interest rate is the sole determining factor in choosing a lender, then borrowers should receive quotes from the lenders they’re shopping on the same day, at the very least, if not within the same hour.

    Moreover, I would hope your revised advice would mention the importance of listening to their trusted advisors, their REALTORS(R), who have developed relationships with lenders who have worked with their previous clients and have provided not only competitive rates but also outstanding service before, during, and after the sale has closed.

    • Stephen Speer
      Stephen Speer says:

      Patrick, you are spot on! In addition to your points, it also important to hire a mortgage professional who can navigate through the many pitfalls and roadblocks in securing a loan approval. “Lowest interest rates” do not matter if your loan gets shot down because the person assisting you doesn’t have the experience in maneuvering through the many obstacles in obtaining a loan approval. The advice I give is that If you’re going “shopping” you need to “shop” for a knowledgeable mortgage professional and not “shop” for the supposed “lowest interest rate.”

      • Morgan Sims
        Morgan Sims says:

        Stephen and Patrick,

        Thanks so much for reading my article and sharing your thoughts. Patrick, thanks for pointing the vagueness in “closing costs,” you make a great point that they vary greatly and they aren’t directly related to the lender. By bringing them up I was trying to reiterate the idea that there are more fees to expect that borrowers should budget for. Stephen, I absolutely agree that a mortgage professional (and Patrick, a trusted realtor as well) are critical when purchasing a home and applying for loans, however, it would have been a very short article if I just advised readers to find a professional to do everything for them!

        Thanks again so much for taking the time to read my article and offer some excellent advice to readers.


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