One of the most important factors to be considered when applying for a home mortgage loan is the interest rate. The monthly installment that you will be paying is dependent on the interest rate. A slight rise or fall in the rate may lead to a major effect on the loan term.
The best thing, of course, is to keep the interest rate to minimum. You can even buy more home when the interest rate is less. However, the rate of interest on a loan is dependent on a number of factors. You can be in charge of a few while others may be out of your control.
The Federal Reserve controls the rate of interest in the United States. It is the Federal Reserve’s responsibility to keep inflation under control and thus alter the interest rates accordingly. There is no point discussing potential rate adjustments as they are out of our control.
On the contrary, we must look into the factors which are within our control. First of all, we need to make a choice between a fixed rate mortgage and an adjustable rate mortgage (ARM).
The rates on an adjustable rate mortgage will vary as per the changes made by the Federal Reserve and thus are subject to rising one year, and perhaps lowering a bit the following year. On the other hand, a loan with a fixed rate of interest may initially be slightly higher than the ARM, but the interest rate will remain the same for the entire term of the loan.
Paying discount points can help in buying down the interest rate. One percent of the total loan is equal to one point and thus for a loan of $200,000, one point would be equal to $2,000.
All lenders offer different discount percentage but in general they offer a reduction of 0.25% for every discount point you pay. This means if your rate of interest is 6.75% and you are paying one point then the interest rate will be lowered to 6.50%.
The time you plan to live in the home is an important factor to consider before paying discount points. You must calculate the total cost to you with and without points before reaching a conclusion.
Choosing a shorter term for repayment of loan is another option to reduce the interest rate. It will be lower for a 15 year loan as compared with a 30 year loan. However, you would be paying higher installments as you need to pay back the amount in much less time.
Staying on top of your credit report surely helps a lot in keeping the interest rate as low as possible. You will get lower interest rates as your credit score increases. Checking your credit report annually is always a good idea. Review your reports and ensure that there are no errors and always remember to pay all of your bills on time. In case of late or missed payments, your credit score will go down and thus the interest rate for any loans you apply for will be increased.