Improve Your Mortgage Rate in 3 Simple Steps
With mortgages lasting for so many years, even a minor decrease in interest rate can go a long way, in saving huge bucks for you. So, it makes perfect sense for you to try to ensure the best mortgage rates for yourself before you apply for one. Consequently, below are three simple ways in which you can make sure to get the smallest possible mortgage rate in the future:
1. Try to understand and improve your credit: Credit scores and credit reports are the most important part of your mortgage application. All mortgage lenders check the three credit scores- Experian, Equifax and TransUnion and use the median to calculate the rates. To grab best mortgage rate deals credit score of over 650 is ideal. But if you can manage 750 or above credit score, the mortgage rate will further be lowered significantly. If your score is near 650 take following steps to boost it as soon as possible:
- Keep your credit card balance below 35% of your given credit limit.
- Try and keep your accounts stable.
- Make timely payments
- Avoid credit applications
- Check your credit reports every 3-6 months for errors. If you find out some discrepancies it is best to bring it in the notice of credit reporting agencies and get them fixed.
2. Try to eliminate debt: It is very important to reduce your debts. Lenders take DTI (debt-to-income) ratio to determine your borrowing capacity. DTI is calculated by dividing monthly income (pre-tax) by amount paid for debts (credit cards, auto loans and student loans). This same formula is used to calculate minimum payment required by the credit card companies. If the debt-to-income ratio of the borrowers is less than 30%, it is easier to get mortgage. In case your DTI ratio is high, it is suggested to pay-off certain mortgages before you apply for the next. Never close the credit card accounts after you have paid them off as this might affect your credit score negatively. The other way to improve DTI is to try and increase the income.
3. Try to improve loan-to-value ratio: The amount you set out for down payment also affects your interest rate. Down payment is calculated by taking LTV (loan-to-value) ratio in consideration. LTV is arrived on by dividing the sum you want to borrow and total price of the home. Lenders prefer borrowers with LTV over 80%. These days borrowers give only 5% of the down payment or prefer going for no-down payment loan options. In case LTV is less than 80%, the borrower is expected to pay for private mortgage insurance too. Two ways to improve LTV are by choosing a less expensive home or by increasing the amount of down payment.
These three tips will surely help you save thousands of dollars on your mortgage. Remember, reduction in interest rate even by one percent means a saving of at least thousands of dollars. It is better to use online mortgage calculator to know the estimated amount you can conveniently borrow, what mortgage plan to be chosen and what interest rate are you eligible for.
Amanda Lyttle is a finance expert and is a contributor for the Free Credit Reports Instantly website, which is a popular site where you can access your free credit scores and reports.
Category: Mortgage, Saving Money
