If you had to pick one thing to be concerned with when it comes to securing a home loan, it should be the interest rate. This one factor can have a large impact on your payments now and into the future. If you think about it, even a small percentage change in your interest rate can have a large impact on your payments over time, especially if you are talking about a 30-year mortgage. Rather than taking whatever rate you are given, learn how to get the lowest rate available to you.
Fix your Credit
The first step is to fix your credit. This does not just mean make your payments on time; it means so much more. Yes, the lender is going to look at your credit history, so your payments need to be on time, but the credit bureaus and the lenders themselves are going to look at a few other things including:
- The amount of your available credit that you have outstanding; this is called your utilization rate. The higher this rate is, the lower your credit score becomes. Before you apply for a mortgage, try to decrease the amount of outstanding debt you have on any credit lines that exceed 30% of the available credit.
- Make sure your credit lines have been in existence for at least 12 months. If you have a large amount of “new” debt, meaning less than 12 months, your credit score will decrease and lenders will hesitate to give you a loan with a good interest rate because you pose a higher risk.
- Watch how many inquiries report on your credit report within the 12 months leading up to your mortgage application. The more inquiries you have, the harder your credit score is hit and the more leery lenders get, forcing them to give you a higher rate.
Don’t Have Borderline Ratios
Lenders can be rather black and white when it comes to approving you for a loan. You either qualify or you don’t. If you do qualify, which means you meet the required ratios for the chosen loan program, the lender rewards you for being on the lower end of the required ratios. For example, if the maximum debt ratios allowed for a specific program are 31 percent on the front end and 43 percent on the back end, they will give the lower rates to those borrowers that have debt ratios lower than 31 percent and 43 percent respectively. If you are right on the border, you might still qualify for the program, but you will not qualify for the lowest rate available since you just get through by the skin of your teeth.
Lower your Risk
Each of these factors is about lowering the risk you pose to the lender, but the greatest risk is in regards to the terms you have for the mortgage. The longer you take the lender’s money out, the riskier you become to them. This means, for example, that a 30-year term is much riskier for the lender than a 15-year term because you have their money outstanding for an extra 15 years. If you are capable of taking a lower term, you are guaranteed a lower rate than you would receive on a 30-year term. Even a 20-year term is less risky than a 30-year term, which means you would get a lower interest rate just for choosing and qualifying for the lower term.
Pay your Own Closing Costs
Many borrowers take advantage of lender paid closing costs because they can get by without bringing anything to the table. This can be a more affordable option, especially when you are moving into a new house, but in the long run, it costs you more. Lenders have to charge you a higher interest rate in order to make enough profit to pay your closing costs. In essence, you are financing your closing costs because by taking the higher interest rate, your payments are then higher. If you pay your own costs, however, the lender does not need to increase your interest rate in order to cover your closing costs, which helps you to secure that lower rate after all.
Buy a Lower Interest Rate
Last, but not least, is the ability to buy a lower interest rate. What this means is that you pay the lender to lower your rate. The difference that the lender would have made on the higher interest rate is made up in discount points, which is a closing fee that you pay at the closing table. This way the lender makes the profit right up front and in exchange, can provide you with a lower interest rate than the lender would have provided you without paying that discount point or two.
Finding the lowest interest rate really comes down to shopping around with different lenders. Every lender has a different risk level they can accept and different profit margins they need to meet. Once you find a couple of lenders to work with, you can play around with some of the factors, but heading into the process, it is best to have your credit in its best shape, your debt ratio in line, and your mind made up about whether or not you are going to pay your own closing costs or not. Once you have all of these factors in place, you can fool around with finding the best rate amongst the various lenders available to you.
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