When it comes to the interest rate that you are charged on your mortgage, it makes sense to get the best possible rate that you can. Saving as little as 0.5% on a mortgage of $300 000, for example, will translate into reducing your installment by around $85 a month.
While that may not sound like a lot, the real savings come are on the total interest that you will pay over the life of your mortgage. Over a 30 year term, just by reducing the interest rate by 0.5% and not paying a cent extra, you will save $29,890.26!
So, the question changes from whether or not you should try to get a better rate to how you can get a better rate. We’ll go through these steps here – ideally speaking, before you purchase your home. In some instances, this may even mean putting off purchasing for a bit longer – patience will be rewarded in the end though.
If you already have a mortgage, it may be worthwhile to see about refinancing – depending on how much you will need to pay in costs.
What is Your Credit Like?
Most Americans have little to no idea of what their credit score is and how good or bad it is. This is a real mistake and one that could cost you in all areas of your life. Getting hold of your credit report is relatively simple and can help you up your game financially.
If your rating is 620 or below, you are considered a bad credit risk and, if you are granted a mortgage, will pay very high rates. This is not a good time to apply at all.
If your rating is between 620 and 680, you fall in the average range. You are more likely to get a mortgage but won’t get the best rate. If you can, hold off applying until you can increase your rating.
If your rating is between 680 and 740, you have good credit and will qualify for a decent rate, though not the best possible rate.
Anything above 740 is considered excellent and lenders would love to finance your mortgage. This is the ideal rating if you want the best rate.
Improving Your Credit Risk
Improving your credit risk is relatively simple and improvements in behavior can start to show within 3-6 months. Start by:
- Always paying your bills on time and in full – this includes bills like your cable and rental. Though technically not debt, they are used to determine your payment history and credit-worthiness.
- If you have no debt at all, open a small clothing account or credit card so that you can prove to prospective creditors that you are a responsible borrower.
- Get your debt levels under control – if your accounts are all maxed out, start reducing them now. Ideally speaking, you should use no more than 30% of your credit limit on any account in order to get the best credit rating. Cut spending and pay as much as possible into your debt to reduce it.
Lowering Your Risk as a Borrower
Your credit rating is a big part of the equation when it comes to mortgage risk but it is not all that is considered.
Your lender will also need to consider what will happen should the property have to be foreclosed on. The higher the amount of the loan is in relation to the value of the property, the higher the risk that the lender will lose money should the property be foreclosed on.
If you truly want the best possible interest rate, you need to put down as large a deposit as you can manage – at least 20% is best.
This might mean that you have to save up before buying a home but this time can also be put to good use in producing a payment history. I advise opening a separate account for saving the money into and placing a standing order to this account automatically. The amount paid over to this account should be, at the very least, the difference between the rental that you are currently paying and what the installment would be if you were paying a mortgage.
You will effectively be paying your “mortgage” every month and this can help to prove to your lenders that you are capable of meeting the monthly installment.
To sum it all up then – work on improving your credit rating and saving as much of a deposit as you can – the lower your risk as a borrower, the better the rate you can negotiate.