Purchasing a home is an expensive undertaking. You need to save up for a down payment and closing costs, and you need a cash cushion to cover such emergencies as home repairs, job loss, or a health crisis that is not covered by insurance. If you’re weighing the upfront costs of purchasing a home in the Dallas, Austin, or Houston area, keep reading to learn more about whether you should go through a mortgage lender or bank and how to get a low interest rate and other benefits.
Will You Get a Better Rate From a Mortgage Lender or a Bank?
There is no one-size-fits-all solution when it comes to financing the purchase of a home. Some people may want to finance a home through the bank they use every day, and some banks may offer a slight interest rate discount for customers that do their personal banking with them.
However, it is not uncommon for other types of lenders to offer better rates from the get-go. Note that regardless of where you choose to get your mortgage from, there are several things you can do before applying to ensure you get the most favorable outcome possible.
What Can I Do to Get a Lower Interest Rate?
Improve Your Credit Score
Improving your credit score is one of the most effective steps you can take to get a lower interest rate on your mortgage. The less risk a lender takes on when providing you with a mortgage, the lower your interest rate will be. One of the most significant factors affecting a lender’s risk assessment is your credit score.
If you have already purchased a home, keep in mind that it is never too late to improve your credit score. It is always possible to refinance your home at a later date and take advantage of a lower interest rate. To improve your credit score, you need to take a close look at your credit report. Are there any outstanding balances? If so, pay those off. Also, do your best to make at least the minimum payment on your outstanding loans on time every month.
Choose the Correct Loan Term
Choosing the correct loan term will also go a long way in helping you reduce your interest rate. The shorter your loan term is, the less risky the loan is to provide. Therefore, if you take out a mortgage that will be repaid in seven, 10, or 15 years, your interest rate will be a lot lower than if you got a 20- or 30-year loan term.
Make a Larger Down Payment
Saving up for a down payment can be a frustratingly long journey. However, if you are concerned about how much you will pay in interest over the life of the loan, it can be worth it to wait a bit longer and save up a larger down payment before you try to purchase a home. Since your interest rate is affected by the principal you owe on the home, the less you borrow, the lower your interest rate will be.
Additionally, if you can save up 20% of the mortgage to make as a down payment, you do not need to pay private mortgage insurance (PMI), saving you even more money every month. Note that you don’t have to save up for a down payment on your own. Depending on your unique situation, you may qualify for a grant or program offered by the city you are trying to purchase a home in, the state of Texas, or the federal government.
Buy Mortgage Points
Another highly effective step you can take to reduce your interest rate is to purchase mortgage points. This is a great option for people who plan to stay in their homes for a long time. Generally, at closing, you can purchase one mortgage point for the cost of 1% of the value of the mortgage. For instance, if you take out a $300,000 loan, you can purchase two mortgage points for $6,000.
Just make sure that you are honest with yourself about how long you expect to remain in your home. If you sell your home after two years, for example, the total monthly savings enjoyed from a lower interest rate will be less than the money you spent to purchase the mortgage points. It is a good idea to calculate the break-even point (the point at which you will recoup your savings) and strongly consider whether you expect to still be in the home at that point.
Lock In Your Rate
You can also ensure that you get an affordable interest rate by locking your rate in. This mitigates the risk that interest rates will increase before you close on your mortgage. Sometimes, it is necessary to pay a fee to lock in your interest rate, but this fee is definitely worth the peace of mind if you suspect interest rates will increase before your closing date.
If you’re considering a rate lock on your mortgage, ask about the opportunity for a rate lock with a float-down provision. A float-down provision allows for the opportunity to reduce your locked-in rate to current market rates once before your closing date if market rates are lower than your locked-in rate.
Refinance Your Mortgage
To reiterate, it is possible to refinance your mortgage in the future if you are unhappy with your interest rate. You will be required to pay PMI if your down payment is less than 20% of the mortgage. If you take out a traditional loan, you will be able to stop paying PMI once you have at least 20% equity in your home.
However, certain types of loans, like FHA loans, require you to pay extra insurance over the life of the loan if you don’t put 20% down from the start. Refinancing when you have more equity can get you out of this extra insurance payment.
Could I Benefit From Working With a Local Loan Officer Near Austin, Dallas, or Houston?
Yes, you absolutely could benefit from working with a local loan officer if you are looking to purchase a home in Austin, Dallas, or Houston. Working with a local lender will result in a faster approval time. Additionally, local loan officers are better equipped to help less-qualified buyers get approved for a mortgage.
If you have a less-than-great credit score and shaky credit history, you may not get approved by a bank at all. Furthermore, with a mortgage lender, you can get direct communication with a partner who can guide you through the tumultuous home-buying process and fight in your corner. Moreover, you don’t have to worry about service lines when you take out a mortgage with the help of a local loan officer.
The bottom line is that both mortgage lenders and banks, may be able to get you a good interest rate on a mortgage, depending on your unique circumstances. If you want to save as much money as possible over the life of your loan, there are several things you can do to get a more favorable credit score, too. To find out how you can get approved for a mortgage, contact us today at Home Loans With Gary.