You may not give particular consideration to your credit score but when it comes to applying for a mortgage the difference between an excellent and average score can mean the difference in tens of thousands of dollars. Together with the level of equity in your property your credit score is the other key component when it comes to securing the lowest rate, providing you choose wisely between mortgage issuers.
Spend time researching different mortgage lenders and the products they have on offer, and don’t be rushed into anything by using a mortgage broker. You can locate the best rates by searching online and communicating directly with lenders. Look for fixed rate offers which guarantee your level of payment for a set number of years but always take care there are no penalties for over payments. Make use of online mortgage calculators as you comparison shop, paying particularly heed to the overall amount of interest to be repaid.
If you are considering refinancing to a lower rate than wait until your equity exceeds at less 20 percent and your credit score is in the highest digits. If you are applying for a mortgage for the first time then save hard for a down payment of at least 20 percent and work on ensuring your credit score is excellent. Don’t underestimate the difference that just one percent on the interest rate can mean to the total cost of the debt you are about to undertake.
As an example a borrower with 25 percent equity in a property valued at $200,000 is paying five percent interest over a 20 year term. The monthly payment is $1,198 and the total interest to be repaid is $87,584. By reducing the interest rate to four percent on exactly the same terms the monthly payment falls to $1117, and the total interest to be paid drops to $68,152, a saving of $19,432.
However the savvy borrower then uses the interest rate reduction to shorten the term of the loan to 18 years and still pays less than the original monthly installment with a new payment of $1,183. The total interest to be paid has now dropped to just $60,664, a massive saving of $27,000 from the original amount due, plus the borrower has shaved two years from their mortgage.
If the same borrower was to take the plunge and increase their monthly payment they would make even greater savings, but it could be safer to stay with a comfortable monthly payment and make additional payments whenever possible.
This example highlights just how crucially important it is for mortgage borrowers to stay on top of their interest rates and never become complacent. There is almost always a better deal to be found if you are in a financially sound position to go after it.
The most usual way to reduce the interest rate on your mortgage is to refinance. If you can find a good offer with a different mortgage company then put it to your current lender as an opportunity for them to reduce your mortgage rate to retain your business. You could then save the cost of refinancing. Naturally they will want to retain your business if you are a reliable payer with an excellent credit history and equity built up in your property.
Even if you do need to refinance, the savings you will make by reducing the interest rate will begin to cover the costs of refinancing after the first year. Make sure you have the necessary cash reserves to pay for the costs of refinancing and don’t be tempted to add them to the life of the loan, thus paying long term interest on the costs.
It pays to be constantly aware of the changes in interest rates and the opportunities to change your mortgage loan to take advantage of the best available rates. By maintaining an excellent credit score and increasing your equity you will always be in a good position to be offered the most preferential rates.