Interest Rate Reductions
Even though the market is what usually determines your mortgage
rate, there are things you can do to save.
If you are borrowing more than is recommended by the Fannie Mae
and Freddie Mac conforming limits, than you will be paying a higher
interest rate. These conforming limits change every year, so make
sure you find the current limits if you are purchasing a mortgage.
Shorter loans will save you on interest, but you will have to
pay more each month. This sounds contradictory, but it makes since
if you think about it. Since you have to pay it off faster, you
have to pay more in a shorter amount of time. However, because
you are paying the loan off faster, they will not charge you as
much for the loan, meaning you will have lower interest charges.
If you really need a loan just to start off but are pretty sure
you can pay it off after 15 years, a short loan is definitely
the cheapest way to go. Some people purchase a longer loan because
they figure it will be more beneficial to have less of a limit
or deadline on payment, when in reality all they are doing is
creating excess cost for unnecessary leeway.
Remember that if you want to reduce your interest rate, increase
your down payment!
You will get the best interest rate if you pay over 20 percent
for a down payment. If you pay five percent or less for a down
payment, you will have less equity or collateral and, therefore,
higher interest. In other words, you won’t officially own
very much of your house, which makes you more of a risk to lenders
and investors. They want to know that if you do not pay off your
loan, they can take your home and will have some value to them.
If you do not have much to give them upfront as “insurance,”
then, as a result, they are going to wind up charging you more
for their services.
Points, points, points. You’ve heard it before: Pay more
points to lower your interest. All you need is a little extra
cash, as buying points is fairly expensive. It will be worth it
later, though, if you can come up with the change. Instead of
‘a penny saved is a penny earned’, here ‘a penny
paid is a penny earned’.
Don’t forget closing costs. If you do not pay all of the
closing costs, which are fees the lender charges you to process
and distribute your loan, the lender will pay them. Good, you
may say. No, not good. You know better than to think that the
cost will just fly right out the window! What you are not paying
to close, you will pay in interest.
Lastly, keep a good credit record and avoid debt. These factors
play a large role in the interest rate you will be charged by
a lender. If lenders are weary of your ability to pay off a loan,
they will insure themselves. Their insurance is your interest.
So, check your credit often and try to pay off all debt. You will
be thanking yourself for the extra work when it comes time to
purchase a mortgage for your dream home!