How to Get the Lowest
Interest Rate Possible on the
Mortgage of Your First Home
Unless you are Donald Trump, lenders will always provide a lower interest rate for a secured loan than they will for an unsecured loan. Security for a loan helps reduce risk for the lender, and part of the formula for determining the interest rate takes into account risk to the lender. The higher the risk, the higher the interest rate.
The first step in getting the lowest possible interest rate when you buy your first home is to develop a high credit score. The higher your credit score, the safer you are viewed as a borrower by the lender. If you can get your credit score up into the category of excellent, which is 720 or higher, you will qualify for the interest rates given to only the best borrowers.
Now, just because you have a high credit score and thus qualify for the lowest interest rate doesn't mean that you will automatically get the best rate wherever you apply. There are still steps you need to take to get the absolute lowest rate available. Remember, the safer the loan is for the lender to make, the lower the interest rate will be. Therefore, you'll want to put a substantial down payment on the house that you are going to buy. Lenders like to typically see at least 20%, and they finance the remaining 80%. This assures them that you have a vested interest in the property and are much less likely to stop making payments and abandon the property. Also, in the event that they do have to foreclose on the property and sell it to recover their money, they are safer having loaned only 80% of the value of the home. The lender would be more likely to recover the full loan amount, including costs, than if they had financed 100% of the home's value.
If you do not have the necessary funds for the typical down payment, most states provide financial assistance for first time home buyers. This assistance can be in the form of very low interest loans or even outright cash grants. Please see first time home buyer grants for complete details of what is available in your state.
Another way to obtain the lowest interest rate is applying for the loan online, an effective modern medium. Banks with local branch offices have very high overhead. Think of the cost for all those nice buildings, as well as the cost to employ the staff at each location. Banks need to charge enough in interest to pay for all those items as well as earn a profit. Online lenders do not have those same overhead costs. As such, they can and do provide much lower interest rates to home borrowers.
Also, banks are not set up to efficiently process myriads of loan applications. To illustrate, think of banks as a car manufacturing company that builds each and every auto one at a time, by hand. Compare that the the automated assembly line of Ford Motor Company. Who do you think can produce a car for the lowest possible cost? Online lenders who specialize in mortgage loans have automated many of the steps. This brings the cost down, as well as the fact that they are operating on an economy of scale. The savings get passed on to the consumer.
Lastly, when you apply online you get flooded with loan offers from numerous lenders. This way you're able to choose the best loan offer that has the lowest possible interest rate. Remember that there is fierce competition in the loan market, and you can take advantage of that for your own benefit.
Follow these steps and you will get the best interest rate on
your first home, guaranteed.