No matter the type of loan (mortgage, auto, boat, business, etc.), a lower rate means greater savings. Whether you need a new loan or are refinancing expensive (high rate) loans there are two things that should always be considered:
1. What is the best way to finance or refinance?
This is an important topic to cover with your Financial Professional because the most efficient way to manage assets and liabilities can be complex and counterintuitive. Paying cash (as opposed to using debt) for large purposes may or may not be the most efficient way to manage your assets. The real answer depends on many factors, including interest rates and the effect on your long-term financial plans.
Just because lower rates are available doesn’t mean you should automatically refinance. Most loan repayment plans heavily weigh the interest owed early in the repayment schedule. This means that even though lower interest rates exist, you may pay more in the long run if you refinance. Any good Financial Professional can perform a quick analysis of your loan(s) to see what the real cost or savings will be.
2. What rate are you qualified for?
A number of factors determine the rates you qualify for on a loan. Generally the three most important are:
1. Loan-to-value (LTV): The amount of the loan divided by the value of the property (house, auto, boat, etc.) the loan is for. The greater the LTV percentage the more risk the lender has and in turn, the higher the rate.
2. Debt-to-income (DTI): Debt-to-income is an indication of your cash flow. It is the percentage of your income that is already committed to paying current expenses and bills. The higher your debt-to-income ratio, the more risk to the lender and in turn, the higher rate.
3. Credit Score (FICO). Credit scores typically carry the most weight when it comes to determining lending rate as they tend to be the best indicator of risk for the lender.
InvestorKeep recommends you speak with your Financial Professional prior to doing any financing or refinancing, ensuring you use the best method and get the best possible rate.