When it’s time to buy a house, all the confusion over rates and mortgage styles can really boggle the mind. The terminology is frustrating at best and misleading at worst. Many people assume they save money by getting discounted mortgage rates, but may in fact be getting the rate their credit qualifies them for, or a rate higher than it. What a home buyer needs to know about getting discounted mortgage rates isn’t as important as what they need to know about how their interest rate is calculated and what types of mortgages are available. Armed with that knowledge, the home buyer can get the best discounted rate mortgage possible.
The first thing to understand with regards to interest rate qualification is what the lender is basing their base rate upon. Most lenders use the prime rate, which is decided by the Federal Reserve, but some may use other interest calculations to start from. In fact, some may start lower or higher by a certain percentage. If a consumer is not careful about reading the contract, they may figure out too late that the interest rates their loan is calculated from are always 1% higher than the prime rate. On the other hand, a discounted rate mortgage can mean the lender starts calculating 1% lower than the prime rate. Carefully read and question what the exact interest rate is calculated from before signing a contract.
In order to get a really good rate, understand what determines your rate of interest. If a lender is basing the rates on the prime interest rate, a home buyer’s credit will determine whether the interest rate is higher or lower than the prime rate. For example, a consumer with a 720 FICO score will probably be able to get 1-1.5% lower than the prime rate. A FICO score is a 350-950 rating scale of credit based on credit history, the type of credit a consumer has, how long they’ve had credit and how many open applications for credit the consumer has at the time of the current application. The more inquiries into the credit, the lower FICO score a consumer rates. This is why it is important to order a credit report that includes the FICO score before applying for a loan. Once that knowledge is handy, a buyer can shop around at various lenders for the best discounted rate mortgage their credit will allow.
When it’s time to actually shop at different lenders, arm yourself with the most information possible. That includes not only getting a FICO credit score, but calculating your debt to income ratio (recurring monthly divided by monthly gross income) and finding out which loan is better for your budget; an ARM (adjustable (variable) rate mortgage or FRM (fixed rate mortgage).