One of the most important things to do before getting a mortgage is to ensure that you get a much lower interest rate. After all, who wants to pay more than necessary, right? The thing is that interest rates determine the total cost of the mortgage. Getting a lower interest rate means that you’ll have to pay less.
The interest rate is calculated as the percentage payable on your total loan amount. It is also called the mortgage rate.
Rates set by lenders can be either fixed or variable. It’s the variable rates that you may want to stay away from, as they are quite unpredictable. Rates fluctuate depending on the market condition. They are also dependent on the loan type and your available funds.
There is yet another way to know how expensive the home loan will be: the APR cost. The APR is the Annual Percentage Rate. It is calculated as a percentage of the entire loan amount and finds out the total cost of the mortgage. The Annual Percentage Rate is composed of lender fees, discounts, interest rates, and various other charges. The APR gives you a bird’s eye view of how much the mortgage is going to cost you each year.
As with any loan you take, a mortgage consists of the principal amount and the interest. The principal is the amount that the lender gives you. The interest is what he earns for providing the principal amount in the first place!
The principal balance decreases over time as you continue paying it back. The interest tends to be high in the beginning, but does down as you keep on paying back the principal.
Here are all the things you need to know to get a lower interest rate!
While it may seem impossible to figure out anything about home loan rates, it is not that hard. Even without an advanced education on the financial and banking industry, you can figure it out yourself by two key indicators.
The first indicator is the Prime Rate, which you may also know as India Prime Lending Rate. The Prime Lending Rate stands for the lowest average mortgage rate at which banks are offering credit. Banks use the prime rate for their interbank transactions. Banks also give prime rates of lowest rates to the borrowers they trust the most.
The 10-year central government treasury bond is the second indicator. As its yield rises, the mortgage rate rises as well, and vice versa.
A lender offering you home loan does not do so without risk. The lender understands that there is a chance that you may not be able to pay back the loan, and takes that into account. If your loan application is seen to be very risky, your interest rate will be appropriately high.
The high-interest rate offsets the risk, as it allows the lender to recover the principal amount faster. However, this interest is not chosen arbitrarily. Lenders pick the rate after studying your income, financial situation, loan type, loan amount, and your creditworthiness.
The credit score is one of the most critical determinants of your interest rate, and thus your loan amount. If you use your credit responsibly and pay bills on time, you’ll have a high credit score. In similar fashion, you’ll have a low credit score when you don’t pay bills on time and don’t use credit responsibly.
Before you even apply for a home loan, make sure that your credit report is in order. Look for administrative errors caused by agency calculations, red flags caused by you such as due accounts, accounts in collections, and late payments. If you do find errors not caused by you, report and dispute them immediately. If, on the other hand, you have caused the negative remarks, correct them soon.
It is essential to understand how your home loan rate is affected by your credit score. Sometimes, you may come across subprime lenders that offer you high-interest loans when they learn you have bad credit; it is better to stay away from them. Knowledge of your credit score can very well save you from such instances.
Your income level and employment history are two critical factors as well. Lenders give the best home loan with the lowest rates to those with exceptional income levels and good employment history. If the records in these two sectors are poor, you can expect lenders to give you high-interest rates. Lenders shall ask you to furnish tax returns for the previous two years as well.
Additionally, the lender could check your employment history by contacting your previous employers. Are their gaps in your employment? Have you been out of work? What is your skill level and profession? All of these could be taken into account.
If you are self-employed, things are a bit more complicated. For instance, you may need to pay higher interest. The rules for the self-employment verification is more stringent as well. All this information is used to find out your debt-to-income ratio.
Before giving you the funds, lenders have a few more things to check, such as your debt concerning your gross monthly income. There are two formulas for calculating this: Front-end Ratio and Back-End Ratio. After these are calculated, and if the DTI ratio is high, your loan application will be declined. This is because a high DTI is considered a sign of you defaulting.
To get a home loan, you need to make a down payment up-front. Different lenders have various requirements, yet it is agreed that the more you pay as a down-payment, the less your interest rate will be. This is because when you spend a large sum of money upfront, the lender’s risk is mitigated. You also get a lower Loan-to-Value Ratio (LTV). Thus, the lender has no problems in giving you low-interest.
Now starts the fun part. You practically go shopping for the best mortgage available. This means that you talk to and compare the various lenders interested in working with you. The one you are looking for offers the best terms and the lower interest rate.
You should also look at the closing costs and fees payable to the lender. Some costs can spiral up quickly if you’re not careful. Stay away from discount ‘points’ and ‘low-closing costs,’ which normally increase the interest rate.
Consider hiring a mortgage agent. It saves you time as well as money. Consider contacting some lenders directly, as well. For a good comparison, check our at least five lenders and their products.
It is certainly possible to negotiate the rate, but for that, you need to comparison shop. Ideally, you need to have strong credit, employment history, and stable income, as well. This gives you more negotiating power than other borrowers.
If your loan application is accepted, you get the option to lock your lower interest rate. This has both advantages and disadvantages. The benefit is that even if the rate rises in the interim period, you do not need to pay more as the rate is locked. Conversely, if the rate falls, you lose as you still have to pay a higher interest amount. Rate locks remain valid for 60 days. You can apply for an extension, but those are very expensive.
It takes a bit of research and comparison shopping to get a good home loan. It is not the only consideration either. You need to pay close attention to the lender’s closing costs. This includes the lender’s fees. All of these items should be listed or outlined on the loan estimate given by the lender.
To avoid all the hassle involved, you can just apply for a home loan through mymoneykarma. Apart from an easy application process, we also offer the best interest rates from across various banks.
However, to ensure that you are getting the best rate and terms, do a bit of comparison shopping. That will put you in a better bargaining position than most of the other borrowers. Doing so shall also alert you about inflated fees, risky loan attributes, and give you better options to choose from.
In closing, a strong credit profile, having low LTV and DTI ratios, stable employment history, and income, makes you attractive to any lender. This means more bargaining power to you.