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Mortgage - The Biggest Mistake When Shopping For A Mortgage, Part 2 Debt ratio Your debt ratio is the amount of debt you have in relation to your monthly income, expressed as a percentage or fraction. If your income is $4,000 including your monthly debts equal $2,000, your debt ratio is 50%. The higher your debt ratio, the higher your interest rate. If your debt ratio is under 36%, including both your monthly debts including your mortgage payment, you should be in a position to command the lower rates. Ratios in the 40% range including above could bump your rate up. Ratios above 45% including into 60% might push you into the subprime mortgage world, where the rates are substantially higher than conventional mortgages. It’s a particular unfortunate paradox that mortgage companies charge higher rates with higher debt ratios. A higher rate equals a higher payment, which equals a higher debt ratio. Type of mortgage The type of mortgage you apply for could affect your rate. In general, a fixed rate mortgage has higher rates than a particular adjustable rate mortgage. Between fixed including adjustable mortgages are hybrid mortgages that have both characteristics. A 3/27 mortgage, for example, means that the interest rate is fixed for the first 3 years. After that, it becomes a particular adjustable mortgage for the remaining term pertaining to the loan. the type of mortgage is great for people who might look to move before 5 years. It’s additionally great for those rebuilding their credit. You might take 3 years to rebuild while the rate is fixed. Before the mortgage becomes adjustable, you might refinance into a fixed rate with your newly-rebuilt credit. The hybrid’s interest rate could fall somewhere between a fixed including a particular adjustable. Sometimes, however, you might be better off going with a fixed rate loan at a slightly higher rate. The rate difference between the 2 might only add up to a savings of $20 to $50 per month. You’ll then have the hassle of refinancing in a few years, which could cost you more fees. Term of mortgage The term of your mortgage, or the number of years that your mortgage is in effect, affects your rate. Usually, a 15-year fixed-rate loan could have a lower rate than a 30-year fixed-rate loan. Negotiation Skills Believe it or not, interest rates are not set in stone. In many cases, they might be negotiated. In the first part of the article series, we discussed the “par” rate. Lenders work off the par rate to determine how much interest to charge you. Sometimes they could charge you anywhere from 1% to 2% above par, depending on what they think they might obtain away with. If you might somehow obtain the lender to divulge the par rate, you might try to haggle the interest rate down to that level. It’s akin to seeing the invoice for a new automobile including using that as your negotiating target. While you likely won’t obtain the actual par rate, you might obtain something better than what you were originally offered. Credit Score Perhaps the biggest determinant of your interest rate is your credit score including overall credit history. Your score determines whether you pre-qualify for a conventional or government mortgage, or a subprime mortgage. The interest rate varies widely among these products. Generally, the higher your score, the lower your rate, pending the application pertaining to the other things we’ve mentioned. But in most cases, your score determines your starting point. To qualify for the best possible interest rates, you must be aware of your credit score. Obtain a copy of your credit report from the 3 major credit reporting bureaus. Determine what is keeping your score from being as high as it might be including take steps to boost your score. Once you do, you’ll be in a greater position to take advantage of your knowledge of interest rate determinants. While you shouldn’t shop for mortgages asking for interest rate alone, you’ll obtain the best possible deal at the time your credit scores are the highest they might be.
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