Lower Your Mortgage Rates

Lowering your mortgage rates is one of the most significant financial moves you can make. Just a quarter point of interest difference can save you thousands of dollars over the life of a loan. Lower the mortgage rate by a full point and you can save tens of thousands of dollars over a thirty year loan. There are, however, some good ways to get lower interest rates on a mortgage, and some bad ways. 

1. Paying for Points.

Discount points are paid up front to the bank at the time of closing as part of your total closing costs. The way they function is you pay up front for a lower interest rate for the life of the loan. The math works out in your favor, it is true, but [b] only if [b/] you keep the mortgage for the life of the loan (say thirty years.) Otherwise the bank gets more money out of you and they get it up front instead of through the life of the mortgage. Bad idea for you, great idea for them. 

2. Signing up for an Unusually Long Mortgage Term

Most people are familiar with thirty year mortgages. They are so familiar with them that they don't think about the difference it might make for them to get a shorter term mortgage (more about that later.) What some banks will do, however, is sell you on the longest mortgage term they can convince you to do. There are forty year mortgages available. Forty years! Now this doesn't usually lower your mortgage rate. Actually it raises it. Some people though, don't know to look at mortgage rate as interest points. Instead they think lower monthly payments are the same thing. Not true! Just because you lower your monthly payments by spreading out the loan does not mean you are saving money. You are likely paying thousands of dollars of extra interest over the life of the loan. 

1. Increase your FICO Score. Here's how. 

Everyone knows they need a better credit score. The singing guy on TV told them that. Here's how to do it. There are basically three zones of information that are used to calculate your score: payment history, debt to credit ratio, and mix of credit. If you improve each of these three areas you will improve your credit score and lower your mortgage rates. Check your free credit report (you get one free one each year) and see if there are any negative marks in your payment history. If there are false ones, get them rectified by contacting the merchant. If there are late payments see if you can get a good will act by the merchant due to recent faithful payments. For debt to credit ratio, keep your balances low and pay them off every month. Don't max out your cards, and try to keep your loan to value ratios low  on mortgages. In terms of credit mix, it's best to have some installment loans (cars and homes) as well as revolving credit (cards and other monthly debt) rather than only one or the other. Too much of either type makes you look risky. Finally, applying for new credit also lowers your score. Don't get any new credit cards for months before you apply for a mortgage. 

2. Increase your liquidity. 

Banks like to see cash on hand. Liquid cash is a buffer zone. It is flexible and allows you to absorb unexpected emergencies and difficulties. If you only have enough cash on hand to cover your down payment and closing costs you will be viewed as a riskier client. Consider waiting to buy your home until you can empty some CD's without paying a penalty, sell of some stocks at a high price, or simply save up some more cash in an interest bearing savings account (shoot for something over 3%).

3. Increase your down payment. 

Twenty percent down not only drastically reduces your mortgage rates it also eliminates private mortgage insurance. The bank knows that a foreclosure home can usually sell for more than twenty percent of the value of the home relatively quickly. So, the worst case scenario on a traditional loan with a twenty percent down payment is they break even. Go less than twenty percent and they will tag on higher mortgage rates to make up for their risk. This aside, do not increase your down payment to the point that you lose your liquidity. If you do that, then a major repair can send you into foreclosure. 

4. Shorten your mortgage terms. 

Strongly consider a fifteen year mortgage. The rates will be significantly lower and save you incredible amounts of money over a thirty year mortgage. Download an amortization excel spreadsheet online and fill in the details. You will be surprised at the tens of thousands of dollars you can save with a fifteen year mortgage instead of a thirty. Even a twenty year mortgage is a big difference.