With the cost of homes steadily rising, it wouldn’t be surprising if people were looking for a way to save even the smallest amount of money on their home purchase. And between the down payment, closing costs, inspections, PMI, and more, the cost of a home can quickly add up.
Paying interest on your mortgage isn’t avoidable, but you don’t have to feel like you don’t have any control over how much you pay. As you start the homebuying process, you’ll want to consider what factors into the total cost of your loan. The reason being you can improve your chances of saving some cash, especially when it comes to your interest rate.
To ensure you can get the best deal possible, it would be beneficial to understand how mortgage interest works as well as how lenders determine your mortgage interest rate.
How does mortgage interest work?
Mortgage interest, which is a fee charged by a lender for lending money to a borrower, will vary from person to person and lender to lender. Every month when you make your mortgage payment, mortgage interest will account for a portion of that payment. In fact, a majority of the payment is used to pay down interest, while only a small portion is used to pay down the principal balance, or the loan amount.
However, as you continue to make loan payments, and the principal balance decreases, your interest will also decrease. With this change in the amount of interest that is to be paid, more of your payment will go towards the principal balance. With the mortgage interest rate having an impact on the total cost of the loan and your monthly payments, a lower interest rate is better.
What factors affect my mortgage interest rate?
Your lender determines your mortgage interest rate. They do so using a variety of factors that will ultimately help them get a clear picture of your finances and your ability to repay the loan.
Lenders will use seven different factors to determine the mortgage interest rate:
- Credit score: Number used to confirm a consumer’s creditworthiness.
- Home location: State of home.
- Loan type: Conventional, VA, FHA, or other special loan programs.
- Loan amount: The total cost of the home and closing costs minus the down payment.
- Loan term: The time borrowers have to repay their loan.
- Down payment: A percentage of the loan amount paid at closing.
- Type of interest rate: Fixed interest rate stays the same, while adjustable interest rate changes based on the market.
Using the abovementioned factors, lenders will be able to determine your interest rate. Every lender will offer a range of mortgage interest rates, so before applying, you may be able to confirm the rates offered to get a better idea of what the total cost of your mortgage might be.
For example, if a lender’s rates fall between 3.40% and 9.22%, your rate will be between 3.40% and 9.22%. Using a mortgage calculator, you can calculate the cost of your loan and your monthly payments. Of course, if a lender’s rates are too high, you have the option to shop around and look into other lenders who offer something more affordable for your budget.
Next to buying a car, buying a home is likely one of the largest purchases you will make in your lifetime. You might even buy more than one, but as a first-time homebuyer, you may not be 100% sure how to get the best deal. And considering how much people pay in interest, you want to be sure you are getting the best deal.
Tips for Paying off Holiday Debt Before it Hurts Your Credit
Now that the festive season is behind you, what remains with you are the beautiful memories and of course, the huge holiday debt that you accumulated.
As the new year kicks off, two factors can greatly impact your credit; how you pay (or not pay) your debt and how much of your available credit you are using. That said, late or missed payments on your credit cards can hurt your credit and so does using most of your available credit.
To help you stay on the right track, here are tips for paying off holiday debt before it hurts your credit.
1. Cut Back on Your Expenses
One of the smartest moves in paying off debt is to avoid adding more debt. By slashing your expenses, you put your spending under control and reduce your reliance on credit. Also, you might free up some money which can go towards debt repayment.
Cutting back on expenses can take various forms depending on your spending habits. It may entail:
- Creating a budget and sticking to it
- Using cash instead of credit cards to pay for products or services
- Cooking your own meals instead of eating out
- Using public transport instead of driving
- Re-evaluating and canceling subscriptions that you can do without
- Decreasing your usage of utilities such as power and water
- Shop around for better deals and lower prices on shopping
2. Start Paying off Your Credit Card Debt
Your credit card debt is likely to hurt your credit more than any other debt. The reason being, credit cards not only carry high-interest rates but their utilization accounts for 30% of your FICO credit scores.
Credit utilization ratio (CUR) is the percentage of the credit that you are utilizing out of the total credit available.
For example, if the total available credit on all your credit cards is $8,000 and your available balance is $4,000, then your credit utilization ratio is 50% ($4,000/$8,000 X 100).
Higher credit utilization creates the impression of poor debt management. Prioritizing your credit card payments lowers your utilization rate, consequently improving your credit score and saving you money on interest payments.
Tip: Always aim to keep your CUR below 30%, and when looking to build credit, a ratio of 10% and below would be ideal.
3. Take a Personal Loan
A personal loan is a loan that you take to use at your discretion and usually. It comes with a lower interest rate: While credit card rates can average at 14-15%, you can get a personal loan with interest as low as 6%.
You will, however, need a good credit score (690 and above) and stable income to negotiate a good deal. That said, lower scores will attract more interest but you can still land better rates than with credit cards.
As such, if diligently, such as offsetting your credit card debt, you can use the loan to save your credit in the long run. Also, personal loan lenders are increasing by the day, opening more avenues to shop around.
4. Get a Balance Transfer Card
If you are faced with several credit cards with high interest, a balance transfer card can help you save on interest and pay your debt faster.
Typically, a balance transfer credit card charges zero or low interest for a promotional period of 12-18 months. This gives you an opportunity to pay off only the principal of your debt or if any interest, at a lower rate.
On the other hand, this type of credit card may also temporarily hurt your credit in two ways:
- Moving your credit to the new card may increase your credit utilization ratio
- Opening a new credit card account may result in a hard inquiry which may bring your score a few points lower
- A new account will affect the average length of your credit history
Nevertheless, the effects of the above factors on your credit are less severe compared to the effects of not eliminating your credit card debt in the long run.
Better yet, you can still do a balance transfer without hurting your credit using the tips below:
- Ensure that you can clear the debt without fail and within the promotional period
- Make sure that the balance you transfer does not max out your transfer card or cause a higher credit utilization ratio
- Avoid adding more debt to both the original card and the balance transfer card until you have cleared your debt
- Inquire if there is a balance transfer fee and assess its financial impact beforehand
The Bottom Line
It is possible to repay your holiday debt before it hurts your credit. This, however, calls for drastic measures such as change of spending habits, consistency, discipline, and sacrifice. While at it, you might want to start saving up for the next holiday to avoid finding yourself in the same situation come next year.
For further financial advice, credit repair, and consultation, contact Credit Absolute.
How to Avoid Racking Up Debt During the Holidays
The holidays bring a lot of excitement and cheer. But is also a time characterized by a lot of spending. Statistics show that holiday spending goes up every year in the last few years. Unfortunately, holiday expenditure can take a big chunk out of your credit card.
It may feel great while the holidays last but the feeling may not last when you find yourself up to your neck in debt accrued during the holidays. Debt can mess up your life and interfere with your plans especially at the beginning of the year. The question is; can you still enjoy the holidays and still manage to keep off unnecessary debt? Yes indeed! Here are proven ways on how to avoid racking up debt during the holidays.
Work with a Budget
A budget helps you to plan for the available resources and keeps you from doing spontaneous shopping. In your budget, categorize your spending and set money allocation for each item. This can help you have a general figure of the amount that you want to spend and also help you to know where to give more weight. A budget would be worthless if you don’t stick to it; be sure to strictly adhere to it and you will be grateful.
Use Cash to Pay for Expenses
Holiday debts result from credit cards and other loans. Research shows that people who use credit cards for shopping are likely to use many times more money than those that pay cash. There are different ways in which you can put aside some cash for the holiday:
- Sell stuff that you don’t need in the house. This can be furniture, play gear for kids, electronics, kitchen gadgets, etc. As long as they are in good condition and someone can put them into good use, they are better off bringing you some cash.
- Set up a holiday account early in advance
- Use your Christmas bonus to boost your expenditure.
- Cut cost on your normal expenditure to save for the holidays
Adopt Cost-Effective Holiday Events
Taking your family for a cruise around the Caribbean Islands and lodging in 5-star hotels is a great idea. However, if you will still be struggling to pay the debt come next year; it is time to re-evaluate your options. You can still have a memorable holiday with your family and friends without necessarily breaking the bank. Here are some cost-effective options:
- Spend time with your family and friends at home and in the process share meals and gifts
- Plan for traveling at a time when it is likely to be less expensive and save towards it
- Consider Picnics and Parties
Save on gifts
Buying gifts for all your family, friends and other important people in your life can turn out to be one big expensive affair and especially if you don’t have enough cash set aside to cater for this. However, you can also make the gifts genuine, thoughtful, and memorable at a relatively low cost using the following tips:
- If you are in the service industry, offer a free session of your services as a gift
- Get creative and make gifts such as cards for your children’s teachers, boss, workmates etc.
- Instead of buying a gift for each of your friends, bring them together and cast lots where each buys a gift for one and gets one from another
- When coming up with a list of gifts to buy, include other options of about the same cost to avoid spending more in case the first choice goes out of stock or is unavailable
Shopping early helps to spread out your spending and also gives you time to shop for great deals. Since holidays are already fixed, come up with a list of everything you need to buy and start buying. Be on the lookout for discounts and offers such as the end of summer sales and stock up on items with the best deals.
The Bottom Line
The Holidays don’t have to leave you with the bitter after taste of racked up debts. With proper planning, a few adjustments, and being flexible enough to accommodate cost-effective ideas, you can still enjoy your holiday without disrupting your future financial plans.
How to Get the Most Out of Credit Cards During the Holidays
Is it too soon to start planning your end-of-year holiday events? That may be debatable but we all know how quick retailers are to taking advantage of increased sales brought on by holiday shoppers. With Thanksgiving just around the corner most retailers are already advertising for their big shopping events and Black Friday deals. If you, like many others, choose to take advantage of these great deals then you’ll also want to plan ahead.
The biggest temptation during the holiday sales events is to break out the credit cards in order to take advantage of the great deals while they’re available. You might be saving a lot of money on the special deals but if you’re not careful, your credit card costs could end up making those purchases cost much more than they’re worth. That’s why you need to take precautions when using credit cards for holiday purchases. Here are six ways to make the most of your credit cards during the holiday season:
1. Sign Up for a Cash Back Card
For those of you who are not already heavily invested in a specific travel rewards program, you may be better off using a cash back rewards card. For new cardholders you may be able to get a bonus cash back offer when you sign up. If you do plan on signing up for a new card with a cash back deal, look for an offer that gives you a higher cash back percentage (as much as 5 percent) on popular retailers such as Walmart, Target, or even Amazon.
Just keep in mind that you should only choose a cash back or rewards card over a zero or low-interest card if you are able to pay your monthly statements in full. Otherwise it would be better to find a card with a zero-interest introductory rate or low-interest card as it would save you the most in the long run.
2. Activate Your Bonus Purchase Opportunities
Many rewards cards will feature rotating bonus categories which you may need to activate or choose each quarter. If your card does have rotating bonus opportunities, make sure that you log in each quarter to activate. Also bear in mind that many of these rewards may have a limit on how much you can earn so keep track of your purchases and switch cards once you’ve reached the limit.
3. Learn About Shopping Portals
Unknown to many rewards cardholder is the opportunities available from shopping portals. Many loyalty programs and credit cards now offer online shopping portals which will allow you to earn extra points, miles, or cash back from your purchases.
These online shopping portals often feature some of the top national retailers and can usually pad your purchase rewards with extra points per dollar spent. With most airline and hotel loyalty programs, they will likely have their own portals as well. Using these websites can help you stack your rewards earning potential.
4. Examine Your Cardholder Benefits
Holiday shopping often features large purchases on items you wouldn’t normally buy unless they are heavily discounted – which is often the case during Black Friday sales events. For those bigger purchases, you may want to consider your cardholder benefits. May credit cards include benefits such as accidental damage and theft protection, extended warranties, price and return protections. These benefits can come in handy when making a large purchase, such as a new TV or computer.
5. Decide if it’s Worth Getting a Store Credit Card
If you don’t already have a great rewards or low-interest card, you may want to consider getting a store credit card. It is likely that any of the major stores that you plan to shop at during the holiday season will offer their own branded credit card. These cards should never be an impulse sign up though. You should always find out in advance if it’s worth considering.
Most of the retail credit cards will feature a very high interest rate so it is important that you consider their terms and conditions and quality of rewards programs before deciding.
6. Consider an Interest-Free Promotional Financing Offer
It is not uncommon for American shoppers to spend “too much” during the holiday season in order to take advantage of special savings and offers. That is all well and good if you are able to pay off your credit cards in a timely manner but if not, you could end up pay more in interest than the savings you earned from the discounts.
If you are unsure whether you’ll be able to pay off your credit card balances within a few months, you may want to consider opening a card with a 0 percent APR offer for new purchases. These offers allow you to avoid interest charges for six to 18 months. Just make sure you don’t keep a high balance on your card for too long as it can negatively affect your credit score.
For more financial advice and credit repair assistance, contact Credit Absolute.
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