One of the most important factors of your mortgage is the interest rate. It is absolutely necessary to secure the lowest possible interest rate to save money over the life of the loan.
For example, imagine you want to secure a mortgage for $150,000 and choose the 30-year, fixed rate term. This means you will pay a fixed interest rate, in addition to the principal, for 30 years. We will assume you have the potential to qualify for an interest rate between 3 ½ and 4 percent, taking into account several factors we will soon discuss.
Factoring in taxes and insurance we can assume:

  • 3.5% Interest on a $150,000 mortgage over 30 years = $1,004.66 per month
  • 4% Interest on a $150,000 mortgage over 30 years = $1,047.22 per month

The difference in your monthly payment is $42.56. Not a “make or break” for most people, but remember that you are paying this note every month for 30 years. (Which adds up to $15,321.60)

Reducing your interest rate can save you thousands of dollars
There are a variety of factors that play a part in determining your interest rate, and these are the five most important:

  • Credit Score
    Your credit score is the most important factor in determining your interest rate. The number one rule to achieve a good credit score is to pay your bills on time, every time. There are more factors at play, but this is the most important.  To learn more about achieving and maintaining a good credit score, check out this video.
  • Locking Your Rate Too Soon
    Locking your interest rate helps protect you from market changes and secures your interest rate for a set number of days. In most cases, you have the option of a 15, 30, 45, 60 and 90 day lock. A longer rate lock period gives you a higher interest rate the majority of the time.
  • The Loan Amount
    The loan amount plays a surprisingly large role in the determination of the interest rate. A loan can be considered too small or large for lenders to want to handle and can fall into the category of a “nonconforming” loan (resulting in a higher interest rate).
  • High DTI
    DTI stands for “debt-to-income” and is key to determining whether you’re eligible for a mortgage in the first place. It also helps determines your  interest rate. Your DTI is the ratio of what you owe monthly versus what you make. If you have a relatively low DTI, you will be rewarded with a lower interest rate.
  • Lender Paid MI
    Lender Paid Mortgage Insurance (LPMI) is exactly what it sounds like. Your lender pays for your mortgage insurance upfront, but it definitely isn’t free. The lender passes that cost to you through a higher interest rate. That rate can be a quarter to a half percent. Remember how much that half percent cost you over 30 years that we discussed earlier? Hint: $15,000.

To learn more about keeping your mortgage interest rate low, please contact me today!

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