How to Cut Your Mortgage Rate by Half a Percent or More
As mortgage rates slowly rise, potential home buyers and homeowners are wringing because they didn’t take advantage of mortgage rates that dropped as low as 3.65 percent following the Brexit vote in Great Britain last July. With rates expected to end the year above 4 percent, per economists at Freddie Mac and Fannie Mae, they are going to pay a penalty for their delay.
If you take out a 30-year fixed rate mortgage on a $250,000 home and put 20 percent down ($50,000) at 3.6 percent, the cost of your total mortgage would have been $445,200 over the life of the loan, or $1230 per month. Today that same mortgage, at a 4.00 percent interest rate, will cost you $461,489, or $1282 per month — a difference of $16,259.
However, you might pay even a greater penalty for ignoring the single most important factor that lenders consider when setting a rate for a borrow. Unlike rising mortgage rates, this factor is something you can control: your credit.
Lenders set rates in part based on the risk incurred in each loan, and they use credit scores and income to determine risk. Lenders offer different consumers different interest rates or other loan terms, based on the estimated risk that the consumers will fail to pay back their loans. The greater the risk, the higher the interest rate you will be quoted.
You can’t can’t turn back the hands of time nor can you increase your income very easily, but you can take simple steps to improve your credit score.
Small changes in your credit score can make big changes in your mortgages. For example, if you want to take out a 30-year fixed mortgage for $200,000 today and your FICO score is 660 on that same you’re your interest rate will be 4.638 percent, far above the national average and you will pay $170,741 in interest charges over the life of the mortgage.
However, if you could manage to raise your FICO credit score to 760, you could get an interest rate of 4.025 percent. Your total interest costs will fall to $144,778, your monthly payments will be $72 less and you will save $25,963 over the 30-year term of your mortgage.
Here are six easy ways you can raise your credit score:
Keep credit card balances low.
One major factor in your credit score is how much revolving credit you have versus how much you’re using. The smaller that percentage is, the better it is for your credit rating. Always try to make more than the minimum payment.
Better yet, eliminate balances altogether, especially small, “nuisance” balances. The reason this strategy can boost your score: One of the items your score considers is just how many of your cards have balances. That’s why charging $50 on one card and $30 on another instead of using the same card can hurt your credit score. Gather up all those credit cards on which you have small balances and pay them off.
Leave old “good” debt on your report.
Some people erroneously believe that old debt on their credit report is bad. Negative items are bad for your credit score and most of them will disappear from your report after seven years. However, “good debt” — debt that you’ve handled well and paid as agreed — is good for your credit. Don’t cancel old credit cards, especially bank cards… just don’t use them. The longer your history of good debt is, the better it is for your score.
Avoid frequent credit checks.
Every time you apply for credit, it can cause a small dip in your credit score that lasts a year. That’s because if someone is making multiple applications for credit, it usually means he or she wants to use more credit. However, with three kinds of loans — mortgage, auto, and more recently, student loans — scoring formulas allow for the fact that you’ll make multiple applications but take out only one loan. So anticipate that you’ll take a small hit when you apply for your mortgage and don’t open any new credit cards or consumer loans.
Pay bills on time.
Use the automated reminders in your bank’s online site or use a money management site like Mint to be SURE you get a reminder in advance of when bills are due. Late payments are the major reason scores fall and with the online tools that are available today, there is no excuse to miss a payment deadline.
Be consistent. Don’t ask for trouble.
Suddenly changing your borrowing habits like paying less on your debt or charging more over a short period than you would normally raise concerns that you are changing your habits and possibly increasing your risk. If you travel and use a lot of credit for a short period, pay down the debt quickly when you get home. Shop early for Christmas: stretch out your use of credit during the holidays over three months. Don’t take cash advances except in an emergency.
Avoid increasing your debt until after you close.
That new home you are buying may need new furniture and draperies, but don’t pay for them with a credit account before you close. Even if your loan has been approved, lenders have been known to pull a borrower’s credit report the day before closing. If they find significant new debts that will lower your score they can increase your interest rate or even cancel the loan altogether if it negatively impacts your debt-to-loan ratio. Pay the movers the decorators after you close.
Don’t let today’s gradually rising rates keep you from buying a home or refinancing. Remember, you can fight back by getting the best possible credit score you can before you apply for a mortgage.
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