08/30

Shopping is fun – but mortgage shopping isn’t necessarily the most exciting version of shopping.

When you know how to mortgage shop (check out our previous article here), it can be a little less overwhelming. 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 Exactly is Interest?

Interest is what lenders charge on money you borrow – this ensures the lender is paid if a borrower 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 Get the Best Interest Rate

Lenders will look at two major factors 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 (too many lines of credit is seen as more opportunity for a borrower to default)
• 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 borrows 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 making your payments on time. This will likely result in a higher interest rate.

Here are some of the 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.
• Think about cutting back on luxury spending (i.e. daily coffee runs)
• Make sure you’re 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).

Shopping and comparing interest rates saves you money – so better hop to it.

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