How to Fix Mortgage Rates
Most of us don’t have the kind of cash necessary to buy or fix up a home available at our disposal. That’s where a mortgage comes into play. Whether you’re buying your first home, making improvements to one or looking to invest in a rental or vacation spot, your next mortgage can help make your goals a reality.
To get there, though, it’s crucial to get the best possible mortgage rate. The rate and terms of your mortgage matter, since these factors can dramatically impact the total amount you spend. Lower your rate by a percentage point or two, and you’ll save thousands in interest over the course of the loan.
Get the appropriate mortgage
Mortgages have either fixed interest rates or adjustable rates. Fixed-rate mortgages lock you into a consistent interest rate that you’ll pay over the life of the loan. The part of your mortgage payment that goes toward principal plus interest remains constant throughout the loan term, though insurance, property taxes and other costs may fluctuate.
The interest rate on an adjustable-rate mortgage can change over time. An ARM usually begins with an introductory period of 10, seven, five or three years (or even one year), during which your interest rate holds steady. After that, the rate may change periodically.
Save for a bigger down payment
When you make a small down payment on a home, the lender considers you a higher-risk borrower than someone who makes a larger down payment. One place where you’ll see lenders account for this risk is with private mortgage insurance. If you put down less than 20% on a conventional loan, you’ll usually have to pay private mortgage insurance premiums. Until you have enough equity to cancel it, private mortgage insurance will affect you the same way a higher interest rate would: by increasing your monthly payment and your total borrowing costs.
Saving up for a bigger down payment can help you avoid PMI altogether. Even if you can’t put 20% down, you can pay less for PMI with a larger down payment. On top of that, a larger down payment can actually get you a lower interest rate.
Improve your credit score
A lower credit score won’t automatically bar you from getting a loan, but it can be the difference between getting the lowest possible rate and being hit with more costly borrowing terms. The best mortgage rates go to borrowers with the highest credit scores. In general, the more confident the lender is in your ability to repay on time, the lower the interest rate they’ll offer.
To improve your score, pay your bills on time and pay down or eliminate those credit card balances. If you must carry a balance, make sure it’s no more than 20 percent to 30 percent of your available credit limit. Also, check your credit score and report regularly and look for any mistakes on your report. If you find any errors, work to clean them up before applying for a mortgage.
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