First-Time Homebuyer’s Guide to Getting the Best Interest Rate

First-Time Homebuyer’s Guide to Getting the Best Interest RateFirst-time homebuyers: it’s challenging to know when and how to lock in a the best interest rate for your home purchase.  Here are the top steps for novice home buyers when it comes to getting the best interest rates.

Buy the Best House for Your Situation

Combining the right factors in your home purchase is key to locking in the best interest rate. Work on improving your credit score to 740. Also, keep your loan-to-value ratio below 75%. The loan-to-value ratio is the mortgage divided by the appraised value of the home. The lower the loan-to-value, the lower risk for the lender, and the better interest rate you will receive. Lastly, the type of home you’re purchasing affects the interest rate. Single family residential homes are the best options for homebuyers looking to receive a prime interest rate on their mortgage. Attached condos are the second best option, and townhomes round out the bottom of interest-friendly homes. To sum it up, these criteria typically add up to the lowest-possible interest rate:

  • Greater than 740 credit score
  • 75% or lower loan-to-value ratio
  • Single family residential home

Research Mortgage Rates for Your Potential Neighborhood

Interest rates vary from region to region, so if you are moving to a new area, don’t rely on the interest rates of your current neighborhood. When selecting a lender, choose one that is familiar with the region where you’ll be purchasing a home.  Not only will they give you an accurate portrayal of the interest rates in the region, they’ll also be more likely to use a local appraiser, which in turn will increase the chances of your appraisal being accurate.

Lock-In The Current Interest Rate Now

Interest rates fluctuate day-to-day. While some homebuyers choose to play the market when it comes to finding the absolute-lowest interest rate, it’s often not worth the gamble of missing your closing date and your purchase agreement becoming invalid. At best you’ll only save an eighth of one percent on the interest rate—not much of a significant savings when it comes to closing your purchase on time.

U.S. Treasury Bond Correlation to Mortgage Rates

If you are set on tracking mortgage interest rates, the biggest indicator of mortgage interest rates is the trend of the U.S. 10-Year Treasury Bond Yield. Whatever direction the treasury bond yield is trending, that is the direction mortgage interest rates will be headed within about a half-day lag. Keep tabs on the treasury bond yield through CNBC.com.

Watch Out For Unscrupulous Mortgage Lenders

When researching interest rates, keep in mind that lenders’ interest rates are generally within an eighth to a quarter of a percent apart. If you find a lender with a significantly lower interest rate, it probably isn’t an accurate rate quote. To lock in an interest rate, buyers must possess a purchase agreement with the address of the property they’re purchasing. Lenders know that when buyers don’t possess a purchase agreement while shopping for interest rates, they cannot lock their loan in. Consequently, some unscrupulous lenders will take advantage of this knowledge to low ball the interest rate quote. When the buyer comes back to them later down the road—possessing a purchase agreement—and the rate has mysteriously jumped, and it’s too late in the process for a buyer to switch lenders.

Remember: Your Mortgage Interest Is a Tax Deduction

Don’t forget that interest paid on your mortgage is tax deductible. You’ll likely receive a tax deduction between 25–30% of the interest paid each year. Therefore, if your home interest rate is 4%, you’ll effectively be paying around 3% interest annually.

Buying a home is a big step for anyone, but for first-time homebuyers, it’s especially difficult to know how to go about locking in a the best interest rate for your mortgage. Follow these steps to help ease the process and avoid a mortgage meltdown. 

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