So you’re taking on a mortgage, or considering it – congratulations! Also, good job. Educating yourself in financial matters is super smart (though seriously daunting and intimidating sometimes). When it comes to interest rates, it can be easy to dismiss the steps you can take to try and get better rates. However, there are many things you can do before even applying for a mortgage to improve your ability to get a lower interest rate.
It begins with keeping the following in good standing: credit, debt, savings, income, and other assets.
Having a low interest rate is likely going to be important to you in the long run. While a high interest rate may be easy to overlook when purchasing a home, you may feel the financial impact of a higher rate down the road. A higher interest rate will result in you paying more over the lifetime of your mortgage2.
Good credit can result in lower interest rates when you go to purchase a mobile home2. Many people don’t realize how important it is to keep your credit score up or to work on getting into a good credit score range.
When applying for a mortgage or preapproval, it’s also a good idea to keep an eye on your credit report and to promptly correct errors1. You should avoid doing anything that may negatively impact your credit throughout the process of purchasing a mobile home; this includes applying for new, additional lines of credit1.
While your credit score isn’t the only key to a low interest rate, it is one of the key factors2. Your credit report is the main record lenders have of how you spend money. It tells them whether you pay on time, if you pay what is owed, and how consistent you are. It’s riskier for them to lend when your credit score is low in terms of your perceived ability to make payments. It’s similar to a school giving a better scholarship based on grades. While it’s not always fair to those who really have to work for a high grade versus those who are naturally good test takers – both got the same grade. The same is true with credit. If your credit has seen better days, you can improve it with hard work.
Another key factor is your debt1. A lot of debt may deter a lender from lending to you, or may negatively impact the terms of the loan. Lending decisions are typically made on a case-by-case basis, but you definitely want to pay off as much as you can before taking on a home loan. Many people only see their home as an investment and not as debt, which it is. A mortgage is probably the biggest loan you will have in your life. That loan can have big rewards, yet it also requires big responsibility. The best thing to do is either consolidate or pay off debts that you can, or at least have proof that you can consistently pay towards your debt.
Your savings and income may also impact your interest rate and the terms of our loan. Starting to save is obviously amazing when considering a mortgage. It also can look good when your interest rate is being decided. Savings can demonstrate to a lender that you can pay your mortgage payments. This can also be shown if you have consistent income. Having a steady job or creating a savings budget could help you when trying for a better interest rate. Assets such as land, boats, cash settlements, etc. could also positively impact that way that you appear to a lender.
Understanding your credit is the key to reaching for a better interest rate. Don’t just accept a high rate. You’ll pay for it later. Do what you can to make your credit shine!
- Consumer Financial Protection Bureau. 16 August 2018. How does my credit score affect my ability to get a mortgage loan? https://www.consumerfinance.gov/ask-cfpb/how-does-my-credit-score-affect-my-ability-to-get-a-mortgage-loan-en-319/
2. Consumer Financial Protection Bureau. 16 August 2018. Seven factors that determine your mortgage interest rate. https://www.consumerfinance.gov/about-us/blog/7-factors-determine-your-mortgage-interest-rate/