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A mortgage probably will be part of the biggest purchase you’ll ever make. A few simple, smart moves can save you tens of thousands, even hundreds of thousands, of dollars over the life of the loan.
Try these nine ways to save — from a little to a lot — on your next mortgage.
1. Get your FICO score (free)
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Look at your credit score up to a year before you apply for a mortgage or start shopping for a home. FICO is the score used most often by the mortgage industry. There’s no need to pay to see it: Instead, read “8 Ways to Get Your FICO Score for Free.”
Raising your score makes you eligible for a better interest rate on a mortgage. It could take as long as a year to improve that score.
FICO (the Fair Isaac Corporation), the company that invented the score that bears its name, has a loan savings calculator that shows how much you can save by improving your credit score. The calculator displays six ranges of credit scores, from highest (760-850) to lowest (620-639). Alongside the scores are typical mortgage interest rates currently offered to borrowers with those scores.
We tried the calculator at the end of October. To borrow $300,000, for instance:
- With a credit score in the highest range, you’d pay around 3.646 percent (APR), with a $1,372 monthly payment and total interest paid over the 30-year mortgage of $193,813.
- With a credit score in the lowest range, you’d pay around 5.235 percent (APR), with a $1,654 monthly payment and total interest paid of $295,377.
How’s that for a money-saving difference? Having one of the highest credit scores shaves $282 a month off the mortgage payment compared with a score in the lowest bracket. The total bill for a bottom-rung credit score is more than $100,000 in extra interest paid over the life of the mortgage.
Try using the calculator yourself to see the savings differences at various credit score ranges. It’ll make you a believer.
2. Raise your credit score
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Improving your credit score is a slow process, but you can speed up things by using the tips outlined in “Boost Your Credit Score Fast With These 7 Moves.” Also check out “Ask Stacy: Will Paying Old Debts Improve My Credit Score?”
3. Clean up your credit report
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The three major credit-reporting agencies — Equifax, TransUnion and Experian — compile credit histories on us all to help lenders and merchants decide whether they should lend us money or credit, and at what rate.
The information in these reports is the basis for your score. Unfortunately, errors are surprisingly common.
You have the right to one free annual copy of your credit history from each agency. For more about getting your score — and about recent changes to credit scores — check out “How the Latest Credit Report Changes Impact Your Score.”
Check your credit reports for problems or errors as soon as possible before applying for a mortgage, as it takes time to fix mistakes and to make an improvement in your score.
4. Take a meeting
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Meet with several lenders to discuss your borrowing situation. If you are starting the loan search process early, don’t quickly give lenders permission to pull your credit history: Too many inquiries can hurt your credit score, so wait until you’re ready to apply for a loan.
Besides, your free credit score will allow them to help you understand how much you will be able to borrow, and what you need to do to prepare to apply. They can also give you helpful tips on improving your credit score.
Meeting with several lenders will help you understand the process and get a feel for which you’d like to work with. Do the same with online lenders. Comparison shopping for lenders can save you money, as lenders’ mortgage offers vary widely.
5. Keep your emotions from running the show
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There’s no reason you can’t keep an eye on the market and see what’s available. However, try not to start shopping seriously until you’ve got financing lined up.
Falling head-over-heels in love with a home you can’t afford and then stretching finances perilously thin to buy it can be a costly financial mistake. Just ask all the people who lost homes in the recent housing crash because they had mortgages they could not afford.
6. Get preapproved for a mortgage
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Lenders will offer to help you become “pre-qualified” for a mortgage. Pre-qualification won’t help you buy a home or get a mortgage. It just means a lender gave you an estimate of how much you can borrow, and at roughly what rate.
Preapproval, however, is a whole different ballgame. Preapproval means you filled out the application for a mortgage loan and gave the lender permission to pull your credit score. Then, the lender agreed to loan you a certain amount of money — conditioned on approving the property you have chosen.
A preapproval gives you an advantage when shopping for a home. In a competitive market, your preapproval letter from a lender lets sellers know they will not need to wait for you to apply for a mortgage. You are already approved and can make the purchase immediately.
Get preapproved when you are ready to shop for homes. Not all lenders issue preapproval letters, but having one can be a nice advantage.
7. Don’t apply for other credit
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While you are in the middle of applying for a mortgage and buying a home, avoid doing anything that might affect your credit score. Opening a new credit card or credit account can affect your credit score and possibly lower your interest rate. Wait until after you have signed your mortgage papers.
8. Comparison shop for mortgages all you wish
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You are safe making multiple mortgage applications or allowing even numerous mortgage lenders to inquire about your credit score — called a credit “pull”– within a period of around 30 days, FICO says:
Looking for a mortgage, auto or student loan may cause multiple lenders to request your credit report, even though you are only looking for one loan. To compensate for this, FICO Scores ignore mortgage, auto and student loan inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping. In addition, FICO Scores look on your credit report for mortgage, auto and student loan inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry.
Also, checking your own credit score or reports will not hurt your credit score.
9. Make no big purchases until your mortgage closes
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Once you find a home, you might want to start shopping for furniture and appliances, window coverings and home improvements. Don’t purchase these items on credit — or apply for new credit — until after your mortgage loan has closed. New purchases affect the amount of credit you have available and can change your eligibility or the cost of your mortgage. So, hold off until your mortgage is a done deal.
What’s your experience shopping for a mortgage or refinancing? Share with us in comments below or on our Facebook page.