When it comes to buying a home and taking out a mortgage, the fact is that the interest you pay will likely be your biggest expense. The interest on a mortgage can be quite significant, especially when looked at over a 15 or 30 year period. All that interest can really add up, and is important to keep your interest rate as low as possible.
One obvious way to keep your interest expense as low as possible is to get the lowest interest rate you can. This may be obvious, but it is easier said than done. Banks typically reserve their lowest interest rates for those with the very best credit scores and credit histories, and it is important to understand what goes into your credit score.
Obviously things like missed payments or late payments will have a significant negative effect on your credit score, but there are other things you may not have thought of. Before applying for a loan, many people close credit card accounts they are not using. While this may seem like a good strategy, in reality it can be counterproductive.
That is because a large part of your credit score consists of the age of your credit accounts, so closing long standing credit accounts could make you look like a newer, and riskier, borrower.
Another important way to keep your interest expenses as low as possible is to make as large a down payment as you can. There are many reasons to make a large down payment, even if it is a struggle to come up with the money you need. For one thing, a higher down payment will mean a lower monthly mortgage payment, and that will make it easier to make ends meet down the road.
For another thing, a higher down payment may qualify you for a more favorable mortgage, and a lower interest rate. Since even a small difference in the interest rate can have a significant effect on your mortgage expense, it can mean a significant savings for you.
Another reason for making at least a 20% down payment on the home you buy is to avoid buying the costly and unnecessary private mortgage insurance. This type of insurance is designed to protect the lender in case of a default on the mortgage, and it is typically required if the down payment is less than 20%.
Using these strategies to keep interest rates and interest expenses low is a good way to get the home you have always wanted at a price you can afford.