How to Take Advantage of the Lowest Mortgage Rates

Most people who are getting a mortgage believe the number one factor to consider is the interest rate, and rightly so. Over the average mortgage term (around thirty years) a single percentage point in interest can mean thousands of dollars more spent on the mortgage rather than going into your pocket.

The interest rate on your mortgage is all-important, so it is definitely worthwhile learning more about how interest rates work, and how you can take advantage of low interest rates. With that in mind, here are some tips that will help you get the lowest mortgage rate.

Tip #1: Bargain from a Position of Strength

If you want to negotiate the most favorable terms for your mortgage interest rate that you possibly can, it is important that you negotiate from a position of strength. With mortgage terms and conditions relying ever more heavily on risk-based assessment, getting a low interest rate is all about convincing a lender that you are a good risk.

For the most part, this means having a good credit score, stable employment, and a good income-to-debt ratio. What can you do to improve your odds?

• Get a copy of your credit report and check for errors that might lower your credit score. Take a look at this information several months before you plan to apply for mortgages to give you time to fix errors and have your credit rating adjusted accordingly.
• When you apply for a mortgage, any debt that will take longer than six months to pay off will affect your mortgage eligibility. Before taking out a mortgage reduce your long-term debt, and don’t take out any loans or make large purchases until after you’re approved.

Tip#2: Know the Value of your Money

Before negotiating with a mortgage lender, you should know where your money is best spent. Will you benefit more from making a large deposit, or from buying points to lock in a low interest rate? Should you get a twenty-year mortgage or a thirty-year loan?

Example: You borrow $270,000 with a $30,000 deposit at 8% interest over 20 years. Your monthly repayments will be $2,258, and you will pay $272,103 in interest.

What if you pay a $50,000 deposit?  You’ll borrow $250,000, for monthly repayments of $2,091 and total interest paid of $251,864. The larger deposit saves you $20,239 in interest and your monthly repayments are $167 lower.

Or, let’s say you reduce your mortgage to 15 years. In this case you pay $2,580 per month and pay a total of $194,447 in interest – and you save a whopping $77,656 in interest.

Alternatively, if you reduce the interest rate on the twenty-year loan by 0.25%, you pay $2,217 per month, and save $10,038 in interest over 20 years. Amazingly, reducing your interest rate by just one quarter of a percent leads to a saving of a little over $10,000.

So what does this mean? Reducing your mortgage term is definitely the best way to reduce the amount of interest you pay over the term of your mortgage. However, to vastly improve your negotiating power, you are better off increasing the size of your down-payment. This way, you can negotiate a lower interest rate, and even a small reduction leads to big savings.

Tip #3: Buy Points and Lock in a Low Rate…Possibly

When you are in the midst of mortgage negotiations, there are a couple of optional extra steps you can take to reduce your interest rate, but remember, it is not always financially prudent to do so. Every case is different, so do not assume these steps are inherently beneficial.

• If your lender offers points (most do) you can purchase points to reduce your mortgage interest rate. This can be a very good way of saving money over your mortgage term, but it is extremely important to do the math and make sure you are saving more in interest than you spend on points.
• If you feel confident (and knowledgeable) enough, you can try to lock in a low interest rate. This means your lender agrees to lock in your interest rate at a rate you agree upon, until your mortgage is processed. If interest rates rise, you get to keep the lower rate, but you are still locked into the higher rate if they fall.

Tip #4: Get Pre-approved

What does pre-approval have to do with getting a lower interest rate? Simple, if you get the mortgage before you go looking for a house, time is not an issue, and you can negotiate at your leisure. If you wait till you have found the house of your dreams, you are going to feel pressured to get that mortgage ASAP, and that leaves you in a poor bargaining position.

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