The American Dream of a three-bedroom house and a shiny new car has never been more accessible to more people. There are now loan options to suit nearly every type of borrower. This means that potential homeowners and car owners have the power to negotiate the best terms possible on their loans.
As consumers get smarter about their options, they are also learning how to improve their financial profile before applying for a loan. The payoff for doing a little of research and credit polishing before you apply is potentially enormous. If you lower your interest rate by just 1 percent, you can save $45,000 over the life of a $200,000 mortgage!
What Lenders Look For
When you apply for a loan, a lender takes into account several factors. Key evaluations are: your credit profile, debt-to-income ratio and loan-to-value ratio.
When a lender evaluates your credit, they look at your credit score as well as your credit report to see how financially responsible you have been in the past. For your debt-to-income ratio, the lender divides your monthly income by your monthly payments towards debts. A debt-to-income ratio between 20-39 percent is generally considered good. Your loan-to-value ratio is caluclated by dividing the mortgage loan amount by the property's appraised value. A loan-to-value ratio under 80 percent will lower your interest rates.
Refinancing Rules
Record-low interest rates have made it increasingly tempting for homeowners to refinance their mortgages. Even auto borrowers now have the option to refinance loan is practically identical to financing your first time around. The tough part is deciding when the time is right for you to do it.
Borrowers usually choose to refinance their loans when interest rates drop. Switching a high interest rate mortgage to a lower rate loan can save you thousands in interest payments over time. An approaching balloon payment or a desire to cash out home equity can also lead people to refinance their homes. Before you decide to refinance, calculate how many months it will take for your interest savings to pay-off
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