There’s no place like home – but to own one you’ll need to choose the best mortgage rate.
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First-time homebuyers can save more than $3,500 over the first five years on a home loan by comparing mortgage rates from at least three different lenders, according to the Consumer Financial Protection Bureau.
“It’s important to invest time in comparing. You might need to spend an hour or two making phone calls and seeing what you qualify for. Don’t just go for the first mortgage rate you get,” Kimberly Palmer, a personal finance expert at NerdWallet, told FOX Business.
Here’s how to choose the best mortgage:
Know your credit score and work to improve it
Your credit history is how lenders determine your mortgage interest rate. So be sure to check your credit for any potential errors, and do your best to make payments on outstanding debts like student loans or credit card bills before you start applying for mortgages.
“Try to get your score as high as possible because that will help you qualify for lower interest rate,” Palmer advised.
Types of mortgages
First-time homebuyers can typically choose from two main types of mortgages: a conventional loan, which comes from a bank, credit union or private lender or a government-backed loan.
New homebuyers who will typically qualify for a conventional loan must have good credit (some lenders can go as low as a 620 credit score) and can expect to put down at least 5 percent, according to NerdWallet. Terms can typically range from 15 to 30 years.
If a home buyer has good credit but does not have a lot in savings for a down payment, they could see if they qualify for a government-backed loan.
Federal Housing Administration (FHA) are loans that allow down payments as low as 3.5 percent of the purchase price. VA loans, on the other hand, insured by the Department of Veterans Affairs, offer buyers low or sometimes no down payment options. VA loans are offered only to current military service members and veterans.
USDA loans come from the U.S. Department of Agriculture and are offered to rural property buyers who meet income requirements.
Getting pre-qualified means a lender will take a look at your finances and say how much it’s willing to lend you and outline the terms. First-time buyers can have the upper hand over others if they have a preapproval letter when applying for a home.
Compare mortgage rates
Get at least three quotes and compare both rates and fees. NerdWallet suggests asking lenders if you can buy discount points, or prepay interest upfront to get a lower interest rate on your loan.
Fixed-rate and ARMs
Fixed-rate mortgages mean the interest rate will stay the same throughout the term of your loan. Currently, the average rate on a 30-year fixed mortgage rate is 3.56 percent, according to Freddie Mac. This is one of the most popular types.
Fixed-rate mortgages typically tend to have a higher interest rate than adjustable-rate mortgages, which have low, fixed rates for a short period of time (usually three to seven years) before they reset. These types of rates are usually more appealing for young homebuyers who may not plan on staying put for more than a few years.