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Looking for a Home Loan? How to Get the Best Rate

If you've had an offer accepted on a new home, it's time to apply for a home loan. You likely got a pre-approval letter from a lender prior to starting your home search, but that doesn't mean you have to use that particular lender.

When applying for a mortgage, especially in a low interest-rate environment, you'll have plenty of options to choose from. And you'll see plenty of advertisements for loans with low interest rates. But what you see advertised isn't always the rate you'll get.

Ads usually feature a lender's rock-bottom rate, but not everyone is eligible for it. Your interest rate depends on several factors. Here's how to get the best rate possible.

Raise your credit score

The biggest factor in the interest rate on a home loan is the borrower's credit score. The lowest rates you see advertised are reserved for those with the highest scores. The best way to lock in the best rate is to have a credit score of 800 or better, but a score of 750 or better might be enough for some lenders.

You can get a free copy of your credit report online pretty quickly these days, and it's recommended you do so before applying for a mortgage. Check the report for any errors or old negative entries. If you find any, pick up the phone and start calling to have the mistakes or outdated items removed. It takes some legwork, but it's worth it.

If you are able, it also helps to pay off or pay down debt, especially unsecured debt such as credit cards. Also, don't take on any new debt during the mortgage application process, and make sure you pay all your bills on time during your home search and mortgage application process.

Put more money down

If you can come up with a 20-percent down payment, you'll likely get a better rate than you would if you put only 10 percent down. The larger the down payment, the lower a risk you are for the lender. That risk is what influences the interest rate you'll end up with.

Putting 20 percent down should also mean you avoid paying for private mortgage insurance, which is another way to lower any monthly house payment.

Consider paying points

Lenders can charge points on a loan, which is a way to get some interest upfront. One point is equal to one percentage point of the amount borrowed, and it usually reduces the interest rate by one-quarter of a point.

For example, if you borrowed $250,000 at 3 percent with no points, you could instead pay $2,500 (one point) upfront and reduce the interest rate to 2.75 percent. The lower rate would reduce your monthly payment by $34 on a 30-year, fixed-rate mortgage.

Does it make sense to pay points? It depends on how long you plan on staying in the home and paying the mortgage. Saving $34 per month in interest, it will take you about six years to recoup the $2,500 paid upfront. If you plan on moving or paying off the mortgage before that six-year breakeven point, then it doesn't make immediate sense.

Over the course of a full 30-year mortgage period, you'd pay about $12,000 less in total interest at the lower rate, saving almost five times what the single point would cost.

Shop around

Again, you needn't feel obligated to apply for a mortgage with the lender that issued your pre-approval letter. And while they sometimes have relationships with reliable mortgage brokers or loan officers, you're not roped into any lender your real estate agent refers you to.

It's best to truly shop around yourself. Search for rates online. Call lenders and negotiate. Remember, a quarter of a percentage point can save you thousands in interest payments over the years. Shopping around, in addition to these few other strategies, can be well worth the effort.

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