Getting a Good Rate

There are several factors, including some that are not always entirely obvious, that can contribute to the interest rate on your mortgage as well as the size of your monthly payments. We will look at some of these factors and how they will affect your loan, allowing you to make decisions that reduce the interest rate on your mortgage.

First, taking out a shorter loan can save you a great deal of money in interest payments over the years, though it doesn't actually affect the interest rate. A 15 to 20 year loan will mean that you will have higher monthly premiums, but it will save you money in the long terms if you can withstand the higher premiums. An adjustable rate mortgage may allow you to begin with smaller monthly payments, but you can expect these payments to increase when the interest rate changes.

Another way to get a great interest rate is to choose a larger down payment. A down payment of 20 percent or more will give you the best rate possible. Because you will be starting with less equity as collateral, a down payment of around five percent or less will result in a higher interest rate. Another way to lower your interest rate if you have money to pay upfront is paying points on the loan ý lenders are willing to lower your rate, and thereby your payments, when you pay money up front.

Another factor is whether you pay the closing costs. Closing costs are fees that the lender has to pay at the closing of the deal. If you don't want to pay the closing costs, you will probably get a higher rate that pays the lender additional interest to make up for these costs.

Your credit quality and debt-to-income ratio are also factors in determining your interest rate. If you have good income and credit, you should have no problem getting a great rate from your lender. However, if your income isn't too far in excess of your monthly debts, you may be considered a higher risk and therefore receive a higher interest rate from your lender, even if your credit is good.