Bagging a $300,000 mortgage to pay for your dream home seems like a score—until you begin to calculate the interest you will be paying for the next 30 years, on top of your home’s $300,000 price tag. The good news is that even small differences in your mortgage interest rate can add up to big savings for you. If you take a few steps to get a low interest rate, you can minimize your costs.
Polish your credit.
Your credit score is the first determinate your lender will use to assign you a mortgage interest rate. The shinier your score is, the lower your mortgage interest rate will be. On the other hand, if your credit score is showing some wear and tear, you will be stuck with a higher mortgage rate. Typically, scores above 740 get the best rates.
Give your credit score the old spit shine before you apply for a mortgage by paying down debts, avoiding credit inquiries (you incur credit inquiries when you apply for a new credit card or loan), and paying all your bills on time.
Improve your debt-to-income ratio.
Another determinate of your mortgage rate is your debt-to-income ratio (DTI).
You have both a front-end DTI and a back-end DTI. To calculate your front-end DTI, add up your monthly loan payments and divide by your monthly income before tax is subtracted. This should be no more than 28%. To calculate your back-end DTI, add up your monthly loan payments and divide by your monthly income after tax is subtracted. This should be no more than 36%.
Pay loans down to improve your DTI. As a bonus, your credit score will go up too.
Try to swing a short-term mortgage.
If you can shorten your mortgage term from 30 years to 20 or even 15 years, you will see substantial savings in the interest you pay. However, your monthly mortgage payments will shoot up, so you want to be careful that you don’t exceed your means.
Consider an adjustable-rate mortgage.
Adjustable rate mortgages typically come with very low interest rates for the first 5 years of the mortgage. After the first 5 years, the interest rate goes up – sometimes way up.
If you plan on selling your home within 5 years of purchasing it, an ARM will allow you to get a low interest rate. Just make sure you sell before the interest rate hike.
Many lenders offer you “points” as an option to decrease your interest rate. One point typically costs 1% of your total mortgage. If you can pay cash upfront for enough points to drive your mortgage interest rate down, your wallet will be thanking you for years to come.
Power over your mortgage interest rate does not rest solely in the hands of your lender. There are multiple tricks you can use to get a low rate. When you get a low rate, you save yourselves plenty of money in the long term.