As a first time homebuyer, you’ll need to find a mortgage rate that fits your budget. Therefore, this is not the time to let somebody else do the shopping for you. Furthermore, the terms you get can make a difference in what you pay to borrow the same amount of money.
How do you avoid paying more than you need to for your mortgage? Certainly, compare the offers you get by running them through your online mortgage calculator to see what your payments and interest will be.
1. Start Planning Early
Firstly, if you’re looking for a home right now, getting your finances in great shape may be tough. So try to think ahead; maybe even postpone house-hunting until you can clean your financial house.
In general, you need outstanding credit. Before you’re even considered for a mortgage, conventional lenders will look for a credit score. Therefore, do what you can to get that score up by paying off those credit card balances and other personal debts.
Second, save up! The more you can put down, the lower your mortgage payment and the less interest you’ll pay over time. A higher down payment could even mean a lower interest rate. Coming up with a 30% down payment (vs. the conventional 20%), for example, could drop your rate more than 0.5%.
2. Don’t Look at the Interest Rate Alone
Note, the interest rate is important, but there’s more to compare. Is there a prepayment penalty if you decide to refinance at some point? What are the total closing costs? Closing costs generally amount to 2% to 5% of the price of the home.
For example, if your home costs Kes 1,500,000, expect to pay Kes 300,000 to Kes 750,000 in costs. That’s a big range, so it compels you to see what a lender typically charges.
3. Understand PMI
Though they do count towards the overall cost of your mortgage, closing costs are a one-time hit. However, if your down payment is less than 20%, you’re considered higher risk and required to carry PMI or private mortgage insurance. This makes you a safer bet for the lender.
Nonetheless, you’re the one paying for it each year. That can add thousands of shillings to what it costs to carry the loan. If you do end up having to pay for PMI, make sure it stops as soon as you’ve gained enough equity in your house through your mortgage payments to be eligible.
4. Get the Deal, Close the Deal
Let’s say you get the most amazing mortgage deal. However, you need to move fast. The interest rate – and possibly other conditions – are locked in for a set amount of time. You have to close within the lock period or risk losing the deal. Don’t procrastinate.
The Bottom Line:
Most of the work involved in getting the lowest mortgage rate happens long before you’re ready to apply. An amazing credit score and a great down payment are the best ways to lower your rate.
But don’t blindly trust your bank, realtor or mortgage broker to get you the best terms. They may have a financial motive to steer you in a certain direction.
Do your own shopping, mortgage calculating and comparing. Also, remember that just because you qualify for a certain amount of mortgage, there’s nothing that says you have to borrow that much.