These days very few people can afford to buy a house for cash. So, if you’re looking to purchase a new home, you’re probably planning on getting a mortgage. Obviously, that requires you to pay additional interest to the bank, adding thousands of dollars to the purchase price. By making some smart choices before you sign, you can get a lower interest rate and save yourself a huge amount of cash over the lifetime of the loan.
Improving Your Credit Rating will Lower Your Interest Rate
Good credit is a sure-fire way to get a lower interest rate, and it’s not that hard to do. Pay your bills on time, have some lines of credit that have been open for awhile, and stay in control of your debt, and you should be able to keep a decent credit score in the 700s or higher. Avoid getting extra unnecessary credit checks. Adding new debt while searching for a home can cause your credit to take a temporary dip. If you don’t know what your credit score is, there are multiple websites that can show you a basic version of your credit report for free you can request one a year without harming your score; so take advantage of it to ensure that your score is what you expect. For more tips see: How to Up Your Credit Score
Have Plenty Saved Up
The bigger your down-payment is on your new home, the lower your interest rate will be. Because you have more invested in the home, you are less of a risk to the bank, and they will give you a better deal. If you can save up 20% of the total cost to put towards a down-payment you will avoid the cost of mortgage insurance and reduce the cost even further.
Buying Points to Lower Your Interest Rate
Similar to paying a larger down-payment, buying points can also lower the interest rate by paying more up-front. When you buy points, you essentially give a specified amount of money in order to lower the interest rate, usually by increments of ¼%. This may not sound like much, but when the loan is for hundreds of thousands of dollars on a thirty year mortgage, it can add up to a lot of money over the course of the loan.
Get a Shorter Loan
While thirty years is the usual mortgage-length in the U.S., with the current lower interest rates and depressed home prices, you might be able to shorten that and reduce your interest costs. A Fifteen-year loan means you have a slightly larger monthly principal payment but a significantly lowered interest cost over the lifetime of the loan. Plus the risk to the bank is lower they will lower your interest rate as well. So in addition to paying for a shorter period you also pay a lower interest rate.
If the monthly payment of a fifteen-year loan is just too much, you can still reduce your total interest costs and shorten your loan simply by making extra payments toward principal as often as you can. Check your mortgage documents to ensure that there are no penalties for paying off the loan early, and then feel free to pay as much as you can whenever you can, and soon your mortgage (and the interest that comes with it) will disappear. Also by paying your mortgage every two weeks rather than monthly you can save a bundle see A Bi-Weekly Mortgage can Save You Thousands for more information.
Before settling on a lender, check with several different banks, mortgage companies, and credit unions to find the right mortgage for you. If you just go with whatever bank you have an account with, you could be costing yourself thousands of dollars. Get some good-faith estimates from various lenders before you sign any documents and you’ll be able to find one that works best for you and saves you money.
Buying a house is a big, expensive endeavor, and you certainly don’t want to regret any of the decisions you make when going through the process. If you take some time and make thoughtful choices regarding your mortgage loan, you’ll be able to get one with an interest rate that you can feel happy about when you step into your dream home, and you can put that extra money you would have spent on your mortgage to a better purpose.
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- 4 Hidden Costs to Refinancing Your Mortgage
- How to Hurt Your Credit Score
- To Rent or Buy: That is the Question
- Should I Roll My Mortgage Insurance Premiums Into the Loan?
- 3 Tips for Saving Money on Your First Mortgage
- Mortgage Ripoffs and Money Savers: An Industry Insider Explains How to Save Thousands on Your Mortgage or Re-Finance
- Mortgages For Dummies, 3rd Edition
- More Books on Mortgages from Amazon
Wendy Little writes for insurance blogs. Read more about what the Kanetix polls say about insurance choices.
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