For most people, buying a house involves borrowing a substantial sum of money. Securing the lowest mortgage interest rate helps the homeowner to save tens of thousands of dollars over the life of the loan. However, it may be necessary to improve credit history before refinancing a home mortgage. A better credit score isn’t difficult to achieve, but it requires both discipline and reliability.
Improve Credit History for the Best Mortgage Interest Rates
An improved credit score not only boosts the chance of creditor approval, it also leads to cheaper mortgage rates being offered to the customer. Lenders have tightened their eligibility criteria in recent years so the credit improvement process is now more important than ever. The cheapest mortgage deals will only be offered to homeowners who are unlikely to default on the agreement.
How Does the Lowest Mortgage Interest Rate Affect the Cost of Borrowing?
Information provided by Informa Research Services illustrated the fact that a $150,000 loan over 30-years for a borrower with a credit score of 700 to 759 would cost $763 per month (4.534%). However, the cost of borrowing rises to $890 (5.355%) for the same loan when the applicant’s score drops to 620 to 639. Those who improve credit history will have $127 of extra disposable income each month.
Correct Credit Report Mistakes Before Applying for a Cheap Mortgage Deal
The Fair and Accurate Credit Transactions Act entitles all U.S. citizens to a free credit report every 12-months. It is important to get a copy from Experian, Equifax and TransUnion and scrutinize each of them for errors as each report contains different information. Common mistakes to look for include:
- The name and social security number don’t match.
- Credit searches and applications for credit that were never made by that person.
- Store and credit cards with credit limits that show as being lower than they actually are.
- Outstanding credit that was settled as part of a bankruptcy agreement.
- When challenging bad data, it is important to provide the appropriate supporting information. Failure to do so will slow down the entire process. Although fixing credit report errors can be achieved by that person, many people who plan to refinance a mortgage turn to a credit attorney to ensure that the process is handled quickly and efficiently.
Pay Debts Punctually for an Improved Credit Score and Cheaper Mortgage
In the current financial climate, lenders will only approve applicants’ who have a stable employment and credit history. Provided that the repayments have been made punctually, a prospective customer should already have a good credit score. If this isn’t the case, it will take several years of prompt payments to improve credit and qualify for the lowest mortgage interest rates.
Optimize Revolving Debt for the Lowest Mortgage Rates
Even homeowners who have always paid their installment debt (car finance, loans and mortgages) punctually may still need to optimize their revolving debt (credit and charge cards). Maxing out a credit card and settling the balance at month end may seem harmless enough, but it leads to a lower credit score. This is because using the maximum available credit makes that person appear more financially exposed.
Most financial experts agree that it is inadvisable to use more than 30% of the allocated credit limit in a single month. It’s possible to improve credit history more quickly if this figure is kept to below 10%. If a credit or store card haven’t been used in some time, don’t close the account. Instead, achieve a credit score improvement by using the card occasionally.
How Long Does it Take to Improve Credit History?
Qualifying for the lowest mortgage interest rates can help to save money, but it may be necessary to achieve a credit improvement first. Applicants who already have a good credit rating should be able to achieve this objective within 6-months by optimizing their revolving debt. However, recovering from some of the more serious credit transgressions (defaults, account delinquency and bankruptcy) can take several years. If this is the case, a bad credit mortgage deal could prove to be a better option. It might still be possible to refinance at a later date.