It is natural to want the lowest possible interest rate on your mortgage loan. A lower interest rate results in a lower monthly payment or allows you to afford more house for the same monthly payment. Here are four quick ways to get a lower interest rate on your next mortgage loan.
1. Shorten The Term of Your Mortgage. Lenders charge lower interest rates for loans with shorter terms. For fixed mortgage loans, try a 20 year or 15 year term instead of the standard 30 year fixed rate. A 20 year termmay reduce your interest rate by as much as 1/8% while a 15 year term may save you up to 1/2% of an interest rate. The drawbacks include a higher monthly payment and stricter guidelines for underwriting, but the total interest paid over the life of the loan will be dramatically reduced with a shorter term.
For Fixed Period ARM's (loans that are fixed for 3, 5, 7, or 10 years), the lowest interest rate will again be found with the shorter term loans. The 5 Year Fixed Period ARM gives you a lower rate without a lot of risk of increasing interest rates if you reasonably think you will move or refinance within the next 5 years. Note: The average homeowner is currently moving or refinancing at least every three years.
2. Improve Your Credit. Lenders often offer lower rates for select customers with extremely good credit, especially on jumbo loan amounts (loan amounts in excess of $400,000 based on 2006 FNMA Conforming Loan Limit). To qualify, you will need a credit score of at least 780 - a mark achieved by less than 20% of all credit scored borrowers.
On the flip side, if your credit score is below 680, you may find yourself being charged a higher rate or ineligible for the best programs. Similar credit score hurdles may exist at 520, 580, 620, etc. The key is to find out what your score is and then work to raise it to the next level to obtain lower interest rates or access to better loan programs.
3. Increase Your Down Payment (or Equity). One of the key parameters for loan pricing is the loan to value percentage (loan amount / home value) of your loan. Borrowers using 95% or 100% loan to value financing will find themselves paying a higher interest rate. If you have access to additional cash, find out if you can get a lower interest rate at 80% or 90% loan to value and use the different interest rates to determine the best use of your available funds.
If you are refinancing, getting cash out of your house above 70% loan to value will cost more than at under 70% loan to value and the interest rates really jump for loans at 80% and 90% loan to value ratios. As you are researching interest rates, be sure to ask about the interest rate for lower loan to value percentages.
4. Pay Discount Points. Always consider paying discount points, or higher fees, for a lower interest rate. One discount point, 1% of the loan amount or $1,000 per $100,000 borrowed, will give you a lower interest rate on any quoted mortgage program. You will need to analyze the cost of the lower interest rate against the monthly savings that the lower rate will bring for your mortgage payment.
By paying $2,500 to lower the interest rate by 1/4% on a $250,000 loan, this will save you approximately $600 per year in interest expenses. If you plan to stay in your house for more than 4 years ($600 for 4 years), then paying a point to get a lower interest rate will benefit your pocketbook past year 4 for the remaining length of the mortgage loan.
Chuck Aikens
VP, Internet Lending Current Interest Rates
Greenwood Capital, LLC
7600 E Orchard Rd, #330-s
Greenwood Village, CO 80111
303-607-5306 Direct 866-582-0901 Toll Free 303-253-9516 Fax My Mortgage Blog
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