Most consumers planning to obtain a home loan are looking around to find the best interest rate possible for their situation. This is an important aspect to financing because a small fluctuation in your mortgage rate can mean tens of thousands of dollars difference over the life of your loan.
Here are some important tips to use so you can minimize your mortgage interest rate and maximize the use of your money:
Lenders will look at your credit score to determine whether they will continue looking at your mortgage application or reject it immediately. The best mortgage rates are generally obtained by consumers with a FICO credit score of 740 and up.
Achieving a 740+ credit score requires attention to the factors that make up your credit score, and how much impact they have: payment history (35%), credit utilization ratio (30%), length of account history (15%), recent credit inquiries (10%), and the types of credit you use (10%).
Make your payments on time and keep your balances as low as possible, while still using at least 1% of your credit limit. Using a small portion of your credit limit keeps your credit cards active in the FICO formula and maximizes the impact of the credit utilization portion of your FICO score.
Improve your debt-to-income ratio:
First, consider your “front-end” debt ratio, this is the amount of your pre-tax monthly income that goes toward your mortgage payment, this should not exceed 28%. Develop a detailed budget before applying for a loan so you understand what you can afford on a monthly basis.
Second, your “back-end” debt ratio, or the portion of your monthly income that goes toward all forms of debt pay off including; mortgage, student loans, car loans, etc. should not exceed 36%.
To appear as a lower-risk borrower, take care of your “back-end” ratio to improve your debt-to-income ratio, while also improving your credit utilization.
Consider short-term fixed-rate mortgage:
You have a good chance of getting the best mortgage rate possible by choosing a 15 year fixed-rate mortgage over a 30 year fixed-rate mortgage. This option can improve your interest rate by as much as 0.8% compared to a 30 year loan.
However one of the risks of utilizing a 15 year mortgage may outweigh the reward for many buyers. Having a much higher monthly payment will put strains on your budget and may cause late payments. Choosing a 30 year loan and paying it off sooner won’t give you a lower interest rate, but it will allow you to pay your debt more according to your own terms, avoiding potentially being strapped for cash when you run into an unforeseen hardship.
Larger down payment:
Lenders can give you lower mortgage rates for the life of the loan if they can get more money upfront. This is called paying for points. A point is 1% of the borrowed amount, the more points you can buy, the lower your interest rate will be. The longer you plan to hold the loan, the more it makes sense to pay for the points that will save you money.
No matter what course of action you take to lower your mortgage interest rates, utilizing a combination of all these methods will surely provide the best results. Get creative in your efforts and remember the end result – saving money!
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