Interest rates are the lowest they have been in decades. In some cases, mortgage lenders are offering interest rates in the 3% range. If you are looking to purchase a property, or if you already own a home, there are several tricks home owners can use to lower mortgage rates.
If You’re Looking to Purchase a Home
Credit Score: The first thing anyone will tell you is to ensure that you have a great credit score. That is obvious, but has anyone sat you down and told you why? According to myFICO.com, the best mortgage rates are offered to those with credit scores of 760 and above. On average, they enjoy a 3.433% interest rate. In the same study, for those who had a credit score of 620-760, the rate wasn’t so nice. Usually a mortgage company will offer 5.022% interest. That difference in rates, alone, are reason enough to improve their credit score.
Debt to Income Ratio: A debt to income ratio (DTI) comes in two forms: a front-end ratio and a back-end ratio. The front-end ratio focuses on your housing costs and excludes any other debt. The back-end ratio measures the combined sum of all your monthly debt payments, in addition to your new housing payment. That number is then divided by your gross monthly income. Banks usually want to see a front-end ratio of no more than 28%, and a back-end ratio of no more than 36%. If these numbers are not in your ballpark, focus on eliminating your debt to get a lower rate.
Down Payment: The general rule has always been a 20% down payment is ideal. That’s because anything less than 20%, and you will likely pay private mortgage insurance (PMI). That is insurance for which you will make the payments, in order to protect the lender. All you need to know is that it adds to your payment. For example, if your credit score is 720-759, and your down payment is 5% of a fixed rate mortgage, you’ll have to pay an additional 0.57% on your interest. Roughly, you’re looking at shelling out around an extra $100 a month.
If You Already Own a Home
Half Payments: Just because you already own a home and already give money to a mortgage lender, it doesn’t mean you can’t utilize a few tricks yourself. One trick is to use half payments on your mortgage. For example, if your mortgage is $3,000 a month, why not pay $1,500 every two weeks? You’ll end up making payments faster, because there are 26 fortnights, and only 12 months, in a year. In the long term, you’ll save a few years off your mortgage, as you’re making payments sooner.
Round Up: Even if you round up a small amount, it will still save you money over the long term. If your mortgage is $1600 every month and you pay $2,000, you will save several years off your mortgage on just the interest, alone. Think of a mortgage like a very expensive credit card. You know by just making the minimum payments you’ll never catch up. However, if you pay more than the minimum every month, you will put a dent in your debt and pay it off much faster and cheaper.
These are a few simple ideas on how you can lower your interest rate and pay off your mortgage as soon as possible. That way, more of your money will be spent on things you want, as opposed to the interest rate on a mortgage.