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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

The Savings Game: How to borrow at favorable rates

A house’s real estate "For sale" sign is shown in front of a home in Arlington, Va., in 2020.  (Saul Loeb/Getty Images )
By Elliot Raphaelson and Katherine Rodriguez Tribune News Service

If you intend to buy a new home, or if you intend to take out a loan in the near future for any other reason, you obviously want to have the best credit rating in order to get the lowest interest possible.

Here are some ways for you to improve your credit score.

• Pay your bills on time. Whenever you pay a bill late, it can have a negative impact on your credit score. Use automatic monthly payments with reliable servicers.

• Pay your credit card bill in full each month rather than carry a balance.

• Keep your credit utilization below 30% of your credit limit. One way to do this is to ask some of your creditors to increase your credit limit.

• Don’t apply for too many new accounts. Even if you apply for a new account and are not approved, it can have a negative impact on your credit score.

• Review your credit report and dispute any errors. There are three credit reporting agencies, Equifax, TransUnion and Experian. At no cost, once a year, you can request a credit report from these companies. If there are any errors in the report that have a negative impact on your credit rating, ask for a correction to be made as soon as possible.

• If your credit score is too low to obtain a new traditional credit card, you can obtain a secured credit card. With this type of credit card, a credit limit will be established, and you will have to prepay this amount in advance. However, once you demonstrate that you can use this account responsibly, you should be able to establish new traditional credit cards.

Obtaining the best mortgage rate

If you are buying a new home, you obviously want to obtain the lowest interest rate.

Because inflation is under better control now, the Federal Reserve is likely to reduce interest rates in 2024.

If you are able to increase your credit score and obtain the lowest interest rate, it will reduce the lifetime cost by thousands of dollars.

For example, according to Bankrate, if you have a credit score of 760 or above, it is conceivable that you could obtain a mortgage with a 6.33% rate now.

Comparing that rate with a mortgage of 6.95%, which might be the best rate available with a lower credit score, the difference in payments for a $300,000 mortgage for a 30-year term would be over $44,000.

Another way to lower your interest cost is to use “mortgage points.”

Each point represents 1% of the loan amount; you can pay points up-front to the lender. One point on a $200,000 loan would cost $2,000. Each point lowers the interest rate by a quarter of a percentage point for the life of the loan. If you are planning to refinance the mortgage in a short time frame, paying points up front is less desirable.

Generally, you can obtain the best interest rate on a mortgage from a financial institution where you maintain several accounts, such as investment, savings or checking.

However, you have to be careful to understand the financial institution’s requirements in order to obtain a lower interest rate. If there is a requirement to maintain a very large account minimum in order to receive a lower mortgage rate, it may not be worthwhile.

For example, if the financial institution is offering a lower rate only if you have them manage a large investment portfolio, I would be hesitant to agree to that condition.

Don’t assume that your bank is offering the best mortgage rate. It’s best to investigate multiple financial institutions. However, it would be best to obtain the best rate without having to commit to a large account balance for accounts you may not want to maintain.

Mortgage rates last week

The average mortgage interest rate for a standard 30-year fixed mortgage last week was 7.10%, an increase of 0.14 percentage points from the previous week’s 6.96%.

Thirty-year fixed mortgages are the most commonly sought out loan term. A 30-year fixed rate mortgage has a lower monthly payment than a 15-year one, but usually has a higher interest rate.

The average mortgage interest rate for a standard 15-year fixed mortgage was 6.48%, a decrease of 0.01 percentage points from the previous week’s 6.49%.

Fifteen-year fixed rate mortgages come with a higher monthly payment compared to its 30-year counterpart. However, usually interest rates are lower and you will pay less total interest because you are paying off your loan at a faster rate.

The average rate on a 5/1 adjustable rate mortgage (ARM) was 6.11%, a decrease of 0.01 percentage points from the previous week’s 6.12%. With an ARM, you will most often get a lower interest rate than a fixed mortgage for say, the first five years.

But you could end up paying more or less after that time depending on your loan terms and how that rate follows the market.

When picking a mortgage, it is important to pick out a loan term or payment schedule. Usually you will be offered a 15 or 30-year loan term, but it is not uncommon to see 10, 20, or 40-year mortgages, according to CNET.

Mortgages can be fixed-rate or adjustable-rate. Interest rates in fixed-rate mortgages are set in stone for the duration of the loan.

Adjustable-rate mortgages only have interest rates set for a certain period of time before the rate adjusts annually based on the market.