Mortgages are most consumers’ greatest debt. They involve lots of money, many payments, and high amounts of interest to be paid. No wonder most people think long and hard before they purchase a home. Home buyers can help themselves by following some simple steps to ensure they receive they best mortgage deal possible.
Clean Credit
The best way to get the lowest rate possible is to have a good credit score. Credit scores are a mystery to many but usually boil down to some simple numbers:
- About 1/3 of your score is related to your payment history.
- A little under 1/3 of your score is related to how much you owe.
- A little over 1/10 comes from the length of time you have held credit.
- About 1/10 comes from new credit.
- The remaining approximately 1/10 comes from the type of credit you have incurred
It’s easy to see that best way to earn a great rating is by paying your obligations on time. Forgetful? Use online bill pay or auto payments to keep payments timely.
The next most important financial consideration is how much you owe. Be sure your ratio of debt to income is under about 35%. That means that after you add all of your debt and divide it by your total earnings, your answer should be no higher than .35 or 35%.
If your credit score is low, it may be in your best interest to postpone a home purchase until you can qualify for a better rate. Getting into a home with bad credit or not enough money can lead to more serious issues like foreclosure or filing for bankruptcy in Canada. There are many ways to improve your score quickly.
Mortgage Loan insurance
Mortgage Loan Insurance is required when the amount a purchaser provides as a down payment is less than 20% of the mortgage amount. Owners should have it removed as soon as they owe less than 80% of the appraised value. You must petition your lender to have the loan insurance removed. Lenders may require an appraisal to ensure value, but it is well worth the cost. Most homeowners that eliminate mortgage insurance can save over $100 monthly.
Time Can Be on Your Side
When considering how long your mortgage should run, the rule of thumb is that the shorter the life of the loan, the more you save. If you have excellent financial self-control, you can opt for the lower payments of a 30-year, fixed rate mortgage and thus be able to afford a sizable, monthly principle reduction payment. Bi-weekly mortgage payments also save lots on interest dollars. Shorter loans are typically associated with higher monthly payments but can be paid off significantly faster and can save you thousands in interest over the life of the loan.
When Refinancing is a Good Idea
Interest rates have dropped to historic lows. Now is a good time to consider whether refinancing can save you money. Online calculators will help you determine how much you can save. Don’t forget to factor in closing costs. If your interest rate drops a few percentage points, you can usually recoup your costs in less than three to four years.
Potential home-buyers can save thousands of dollars by paying close attention to these small details.
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