Credit Facts

Your purchasing a home and need to find the lowest possible interest rate on your mortgage loan. Getting a lower interest rate on your mortgage loan can result in a lower monthly payment or can allow you to afford a more expensive home for the same monthly payment. Here are some suggestions that can help you to get a lower interest rate on your mortgage loan.

Increase Your Down Payment - One of the most important components for loan pricing is the loan to value percentage (loan amount / home value) of your loan. Borrowers using 95% or 100% loan to value financing will find themselves paying a much higher interest rate. If you have access to more money for your down payment, you can get a lower interest rate at 80% or 90% loan to value and use the different interest rates to determine the best use of your available funds.

If you are refinancing your home, getting cash out of your house above the 70% loan to value will cost more than at under 70% loan to value and the interest rates really rise for loans at 80% and 90% loan to value ratios. When researching interest rates, be sure to ask about the interest rate for lower loan to value percentages.

Shorten The Term of Your Mortgage - Lenders will charge lower interest rates for loans with shorter terms. For fixed mortgage loans, try a 20 year or 15 year term instead of the standard 30 year fixed rate. A 20 year term can reduce your interest rate by as much as 1/8% while a 15 year term may save you up to 1/2% of an interest rate. The drawbacks include a higher monthly payment and stricter guidelines for underwriting, but the total interest that is paid over the life of the loan will be dramatically reduced with a shorter term.

Improve Your Credit Score - Lenders often give lower mortgage rates for customers with exceptionally good credit, especially on large loan amounts, loan amounts in excess of $400,000. To qualify, you will need a credit score of at least 780, which is a score achieved by less than 20% of all credit scored borrowers.

Paying Discount Points - Consider paying discount points, or higher fees, for a lower interest rate. One discount point, 1% of the loan amount or $1,000 per $100,000 borrowed, will give you a lower interest rate on any quoted mortgage program. You will need to analyze the cost of the lower interest rate against the monthly savings that the lower rate will bring for your mortgage payment.

If you would pay $2,500 to lower the interest rate by 1/4% on a $250,000 loan, this amount can save you approximately $600 per year in interest. If you plan to live in your house for more than 4 years ($600 for 4 years), then paying a point to get a lower interest rate will save you money past the 4th year for the remaining length of the mortgage loan.