08/26

When you’re mortgage shopping (ahem…check out how to mortgage shop with our previous article here), it’s important to know how you can get the best deal – and by getting the best deal, not only do you have to actively shop and compare prices, but you’ll also want to pay attention to those interest rates.

What is Interest?

Interest is what lenders charge on money you borrow – this ensures the lender is paid if a borrow defaults on a loan. The interest rate determines the cost of your monthly loan payments, so it’s pretty important to understand what your interest rate can be.

Your monthly loan payment goes towards reducing your loan balance, while another portion pays your interest. This means you’ll end up paying more than what you’ve actually borrowed. We know this is a bummer, but that’s part of the deal with borrowing money.

How to Receive Better Interest Rates

There are two major factors lenders look at when determining an interest rate: your credit score, and your debt-to-income ratio.

They’ll also take a look at:

• Your history of making – or missing – payments
• The number of times you’ve applied for credit
• If there are any blemishes that show up on your credit report

How to Lower your DTI

Your DTI – debt-to-income ratio – will gauge how much debt you have in comparison to your income. Lenders prefer borrowers with a DTI that’s 41% or lower.

High DTIs can make lenders feel weary about letting you borrow money – they see you as having too much debt already, and will worry about you being able to make your payments if you take on any more. This will likely result in a higher interest rate.

Here are ways you can lower your DTI:

• If you’re able to, consider making higher payments more often on any debt that you currently have. This will help eliminate your debt faster.
• Pay off bills with higher balances. These have the most impact on your DTI.
• If you participate in a daily coffee run, think about cutting back on luxury spending.
• Make sure you are consistent on making payments on time. Most lenders will raise your interest rate if you’re late on your payments (even if your credit score is good).

Before sticking to the first lender, it’s important you shop and compare. Remember to check out the article we wrote up at the top for more information on how to better mortgage shop.

Also – be sure to stop by our Alliance Title Blog and see what’s new in all things real estate.