Improve Your Interest Rate

Improve your interest rate by raising your credit score. A higher credit score can earn you a lower mortgage rate. Lenders want confidence that you can and will repay your mortgage. Your credit score is perhaps the most crucial criterion in deciding your creditworthiness — that is, how likely you are to default on the loan. Borrowers with lower credit scores pay higher interest rates and have more limited loan options. A good FICO credit score is technically any score of 670 or above.  There have been recent changes to how credit scores are calculated, which may make it easier for you to improve your score.

The loan to value ratio  (LTV ratio} compares your loan amount to the property’s price. A lower LTV ratio typically results in a lower mortgage rate. Your down payment will dictate your LTV ratio; the more you put down (a 20 percent down payment equates to an 80 percent LTV ratio), the lower your LTV ratio and the less of a risk to the lender.  If you can’t afford to put down 20%, talk to your lender about how much your rate will change if you increase your down payment even by 5%.

Your debt to income ration (DTI ratio) is the sum of all of your monthly debt payments divided by your gross monthly income, which signifies your financial stability and capacity to manage debt and afford your loan. Generally, the higher your DTI ratio, the riskier you appear to a lender — and the higher your interest rate will be. Most conventional loans allow for a DTI of no more than 45 percent. Still, some lenders will accept ratios as high as 50 percent depending on a borrower’s circumstances, such as a savings account with a balance equal to six months’ worth of housing expenses. Aiming for a DTI of 36 percent or less is best for competitive rates.  If you want to improve your credit score, spend some time saving not only for that down payment but also in paying off high interest rate credit cards.  It is worth talking to a lender several months ahead of shopping for a home to discuss what are the best steps to get that lower rate.

If you can make a significant down payment and have a good DTI ratio, you may get a lower rate with a larger loan. The flip side is also true—if you’re pushing the limits with your purchase, you’ll likely get a higher rate.

Occupancy status, such as if this will be your primary home, secondary home or investment property, can also significantly impact the rate. If the home will be your primary residence, the rate may be lower.  The type of property will also impact the rate. Any property type other than a single-family home — such as a condo, manufactured home, or multi-unit dwelling — will generally increase the mortgage rate.  Condo mortgages are typically a quarter per cent higher than a single family loan for the same person.   Multi-unit dwellings with four units or less are eligible for conventional financing but anything bigger – even a five unit becomes a commercial loan with considerably higher rates and different lending requirements.

Improve your interest rate by paying discount points if you can afford to and you plan on staying in your home long enough to justify the up front cost.   You pay these optional extra fees upfront to the lender at closing in exchange for a lower mortgage rate. In a sense they are prepaid interest.  If you only plan on being in the home a few years the reduction in the monthly mortgage payment may not justify the up front cost, so be careful and double check your math.

Mortgage interest rates can vary substantially from lender to lender. This is due to differences in their pricing strategies, cost structures, margins and risk appetites.

Some lenders may specialize in certain types of borrowers and loans, which influences their pricing. Moreover, lender fees and costs like discount points can also alter your rate.

The cost of originating mortgages includes tasks such as running a credit check, underwriting, performing a title search and completing the many other steps a lender must take to process a loan. In setting prices, lenders have to look at the cost of origination and decide what margins they want above those costs.  The more efficient a manufacturer of mortgages can be, the more competitive they are on pricing.”

I only work with great lenders and I would love to share their names with you.  Just give me a call at 240-401-5577 or email me at lise@lisehowe.com.