Mortgage and Interest

The banking and real estate industries have a symbiotic relationship. In other words, they need each other to survive.  This is because most individuals who purchase homes borrow money from a bank. This is called a mortgage.

Banks depend on a few products to earn money and mortgages are a major product. There are two major components in a mortgage transaction, principal and interest.

• The principal is the amount of money you are borrowing.
• The interest (interest rate) is what the bank charges for borrowing that money.

Imagine a bank decides to lend you a principal amount of $100,000. The bank looks at its criteria for lending and approves the loan with an interest rate of 4%. This translates to $4,000 in interest. As a result, you end up re-paying the bank a total of $104,000 on a $100,000 loan. This is what the bank accepts for the risk they incur to lend you $100,000.

There are a few important factors that go into how much interest a bank charges you for borrowing and how much principal they are willing to lend you. These are the criteria that future borrowers should monitor and improve upon, in order to secure a favorable interest rate and loan amount:

• Credit Score-This is a measurement of how well you repay your bills.
• Income-Money received on a regular basis.
• Debt-Something that is owed or due.
• Employment-The condition of working for pay.
• Liquid assets– Cash or investments that can be converted to cash quickly.

 

The higher your credit score the more favorable a bank looks at you. A high credit score suggests that you pay your bills on time. It also suggests that you manage your debt efficiently. To maintain a high credit score, make sure that you pay your bills timely.  Late payments are frowned upon and will lower your credit score. If you have credit cards, and utilize more than 30% of your credit limit, ensure that you pay it down quickly. Even if you pay the minimum amount due on time, carrying over more than 30% of the credit limit will also lower your score. Therefore, try to pay down your credit cards as soon as possible.

Income speaks for itself, the more income you have, the more favorably a bank will look upon you. A significant amount of income places you in a position to afford more debt. Therefore, try to aim for the promotion on your job. If there are no promotion possibilities, try to secure a part time or seasonal job to increase your income.

Regarding debt, if you have borrowed a lot in the past and owe a significant amount of debt it will lower the amount of money you are able to borrow currently. Therefore, aim to pay down current debt as soon as possible.

Employment is connected to income. Banks want to see that you are earning legal money on a regular basis. You may have inherited $100,000 from your rich aunt, but banks want to know that you have the ability to continually generate income to be able to afford your potential mortgage. Therefore, if you are planning to secure a mortgage, do not quit your job, unless you score a higher paying job.

Liquid assets are used for your down payment and closing cost.  As such, banks want to see that you have money saved to put “skin in the game.” In other words, you are showing the bank that you are serious about securing a mortgage because you are putting some of your own money in the transaction.

In order to secure a favorably interest rate and qualify for a decent loan, focus on improving your credit score and income (earnings). Also focus on reducing debt and maintaining steady employment. Lastly start saving money for your down payment and closing cost.

 

Disclaimer

The views thoughts, and opinions expressed in the text belongs solely to the author. For specific information on mortgages and loans, please consult your bank or loan officer