Your mortgage is likely to be the largest loan you have in your life. As a result, it makes sense to consider the interest you pay. Because your interest rate is based on the size of your mortgage, the smaller the rate, the less you pay over all.
If all you take into account is a mortgage amount of $175,000 and a rate of 4.5%, you will have a monthly payment of $886.70 and your total repayment over the course of 30 years will be $319,211.75. A slightly higher interest rate, of 6%, on that same mortgage amount comes to a monthly payment of $1,049.21 and a total repayment of $377,716.83. A higher mortgage rate can mean a big difference — in this case it’s a difference of $58,505.08!
Getting the best possible mortgage rate can save you tens of thousands of dollars over the term of your loan. If you want a better rate, here are 3 tips for getting the best deal:
1. Improve Your Credit Score
The best thing you can do for your mortgage situation is to improve your credit score. A good credit score indicates that you manage your credit appropriately, and lenders see that as an indication that you are less likely to default. Since you are a lower risk to them, you receive a preferential mortgage rate.
Improve your credit score by making on time payments, paying down debt, especially on revolving credit lines (like credit cards), and fixing errors on your credit report. If you need to wait a few months for your credit score to improve while you take actions to improve it, it might be worth it when you consider the savings.
2. Boost Your Down Payment
A bigger down payment can mean a better mortgage rate. In some cases, you can still get a good rate even with a small down payment, but you are much more likely to get a preferred rate when you have a bigger down payment.
Lenders consider a down payment of 20% as the ideal. You won’t have to worry about paying for mortgage insurance, and the lender sees that is less risk because you are putting a significant amount of your own money on the line. Even if you have a down payment of 5% or 10%, you can improve your chances of getting a better interest rate, since you are taking on some of the risk involved with the home purchase.
Saving up a little more so that you have a bigger down payment can make a lot of difference later, since it reduce the amount you need to borrow, and it can help you get a better interest rate.
3. Pay Points
Another method of bringing down your mortgage rate is to pay points. A point is 1% of your mortgage total. So, in our example of a $175,000 mortgage, one point is $1,750. For each point that you pay, you might see an interest rate reduction of ¼ of a percent. So, if you have a rate of 5%, and you pay two points, amounting to $3,000, then you would see a reduction of ½ of a percent, to 4.5%.
Run the numbers to see if an interest rate reduction now, which would benefit you over time, is worth the cost of paying points. In some cases, you come out ahead if you plan to stay in the house for a long time. However, there are times that you might not be able benefit, such as when you plan to move in a short period of time.
In many cases, a combination of strategies to reduce your interest rate can make it possible for you to save tens of thousands of dollars over the course of your mortgage term.