Monday, September 9, 2013, AM | 1 Comment
Almost everyone, except for the very wealthy, will have to apply for a home loan in order to purchase the house of their dreams. Over the course of the loan, small differences in the loan rate cause dramatic swings in the total cost of the repayment of the loan, meaning tens of thousands of dollars for the lifetime of the loan.
The best way to make sure that you get the best loan rate that you can is by making yourself look good as a borrower when you apply for the loan.
Unlike some of the other loans that you may have applied for, there are other factors that are taken into account when a bank calculates your loan rate that you can control and will have a large impact on rates.
Banks have to look into the future and decide whether or not they think you will be able to repay the loan. If they think that you can, the rate will be low, but if they think that you cannot, they will raise the rate and hope to discourage you.
If you default on the loan and the bank has to foreclose on the home, they want to be sure that they will be able to recoup some of the money that they lent to you.
The higher the value of the home is, in relation to the amount of money borrowed, the better the rate will be. For instance, if you need to borrow $100,000 on a home that is worth $200,000, then the bank will look favorably on the application and give you a better rate.
The biggest single factor that you have control over is how much debt you currently have. Every little bit affects the rate of the loan, and that can mean the difference between an affordable mortgage on a home that you love, and a suffocating mortgage on a home that you hate.
If you are carrying a lot of debt, pay some of it down before you apply. Start with the debt that has the lowest balance, and pour as much free cash as you can into that debt until it is paid off. Then use the money you would have been paying on that debt to pay off the next lowest balance, until you have erased some of your debt. The bank will see that your debt to income ratio has improved, and the loan rate will be more favorable.
Where debt is the thing that you have the most control over, the down payment is what will affect the rate the most. The more that you are able to pay down on the house upfront, the less you will have to borrow from the bank.
That means your loan payments will decrease, because the principal of the loan will be lowered. This means massive savings over the course of a loan, where an increase of five to ten thousand for the down payment can save you over forty thousand for the entire life of the mortgage. Down payments also make you seem like more serious buyers.
The more of your own money you have invested in the home in the beginning, the more you have to lose if the home is foreclosed on. This puts your loan in a very positive light and will get you the best rate possible.
Mortgages are complicated and they require a lot of paperwork and calculations to get the rates figured out correctly. The more positive things that you can bring to the table for your loan application, the better your interest rate will be. A good interest rate can save you hundreds of dollars a month, and will save tens of thousands for the course of the mortgage.
I am Carlos Ruiz and I work with families to get their first mortgages. I wrote this article because I see the little things that people can do every day to make their interest rates more affordable. I want families to get great mortgage rates on their homes, and I recommend www.eacu.org to my clients when they are ready to apply.