Sub-Prime Mortgage Loans - Five Ways To Lower Your Rates On A Sub-Prime Mortgage

Compare Lenders

One of the most effective ways to reduce your interest rates on a subprime mortgage is to compare lenders before applying. Although this step may seem straightforward, many homebuyers overlook it, potentially costing them thousands of dollars. Allocate at least one day to explore various options. Request quotes online and consider conventional lenders as well, as they often provide competitive rates and favorable terms even for those with adverse credit histories.

Consider an Adjustable Rate Mortgage (ARM)

Adjustable rate mortgages (ARMs) typically offer lower initial rates and are easier to qualify for compared to fixed-rate mortgages. However, ARMs may have rates that increase over time. If you plan to move soon or are focused on purchasing a home, an ARM may be a suitable choice. Additionally, you can convert your ARM to a fixed-rate mortgage when your credit score improves. As property values rise and your equity grows, you will have the opportunity to secure better terms in the future.

Increase Your Down Payment

Increasing your down payment can help you reduce your interest rate by up to a percentage point. While zero or minimal down payment options are available, they often come with higher rates. Ideally, aim to contribute 25% of the home’s purchase price as a down payment to obtain the best rates. Ensure you retain enough cash reserves for moving expenses and other costs.

Pay Points Upfront

Paying points upfront can lower your interest rate, but it is crucial to ensure that the savings outweigh the initial cost. If you plan to move or refinance within a few years, the benefits of reduced rates may not fully compensate for the upfront expenditure. Consider using a mortgage calculator to determine whether increasing your down payment would be a more cost-effective option than paying points.

Build Up Cash Reserves

Enhancing your cash reserves can positively impact your credit score, potentially qualifying you for lower rates. Utilize tax refunds or cash bonuses to bolster your savings. Lenders view savings accounts, money market accounts, and certificates of deposit (CDs) as valuable cash reserves, in contrast to more volatile assets like stocks.

By following these guidelines, you can better manage your mortgage terms and secure a more favorable financial outcome.