6 Steps to Get Approved for a Low Rate Home Loan Without Having to Pay Points

When you qualify for a home loan, you want to get a low rate, and ideally, you want to do it without having to pay points. You pay points to get a lower rate so you can reduce your interest costs over the life of the loan.

A point is equal to 1% of the mortgage amount. So, if you are getting a $200,000 mortgage, one point would cost you $2000. This might buy you a loan rate that is .5% or so lower than what you would have had. This can be worth it to save in interest, but points are cash out of your pocket, or costs added onto the mortgage that you want to avoid if you can.

Whether you should pay points or not depends upon two things. First, how long do you want to stay in the home? And how much money do you have for closing?

If you are going to move or refinance in two years, paying points may not be wise. Generally, experts say that paying points to reduce your rate is a decision best for people who will be in the home longer.

If you want to get the best rate without paying points, there are some simple tips to follow. Ready?

#1 Have a High Credit Score!

Ok, this is obvious. But it needs to be said. You will always get a better interest rate on your loan and not have to pay points if you keep your credit score high. This means you do not overuse credit. Do not buy things you cannot really afford. Pay cash for things you really need. Always make your payments on time and pay credit cards in full as much as possible.

It may sound like bad medicine to keep your score high. But people with the best scores get the best rates. And they don't have to pay points to get those low rates.

#2 Get an FHA Loan!

So, if your credit stinks, that means you have a high rate unless you pay points, right? Not really. You can get an FHA loan, which is a government backed loan product that comes with a low rate no matter what your credit score. It may even be a lower rate than you can get on the open market. Amazing.

If you are thinking of paying points on a conventional loan to get a lower rate, at least consider the FHA product.

#3 Put More Money Down!

This is another recommendation that isn't a lot of fun. But the more money you put down, the lower your rate will be, and the lower your mortgage will be. This gets you a low rate without paying points. So, stop going out to dinner four times a month and save that $300 or $400 for your down payment.

#4 Consider an Adjustable Rate Loan!

A good option for a lower rate for three, five or seven years is an adjustable rate loan. This is a loan with a fixed rate for several years, and then the rate adjusts according to market rates. Is this a good move? It can be. If you are going to stay in the home for only a few years, you could end up getting a very low rate and pay no points � a total win. If you stay in the home for many years, it is possible the rate on the ARM could increase and then you are paying a higher rate. Consider this option if you intend to stay in the home a relatively short time.

#5 Buy a Cheaper Home!

It's the American way: Buy as much home as you possibly can! But is it always the smart move? Not usually. If you buy a smaller, cheaper home, you can put more money down on the property and probably secure a lower rate without paying points. Let's face it: Not every person needs 2000 square feet of living space to themselves. Learn to live with less and you can get a lower rate with a higher down payment and not pay those pricey points.

#6 Get Help on the Down Payment!

If you do not have a large down payment, you risk a higher rate, or paying points. You can get help with the down payment by getting a gift from a relative or friend. This is allowable on most conventional and government backed loans.

These methods are effective to get a low rate without paying expensive mortgage points. With some planning, you can get that low rate and not cost yourself an arm and a leg at closing.

References - https://www.thesimpledollar.com/best-mortgage-rates/