Understanding wealth creation by how interest rates work when purchasing a home can mean thousands of dollars in savings over the life of your loan. So, let us now discuss how important it is to acquirer a low interest rate when buying real estate.
When buying real estate, one needs to determine if they are going to buy the property out right to create a cash flow or finance the property with a lender. The only reason to rent, instead of buy is, if you feel that the expenses of the house could overwhelm your budget. However, if you do buy, there is a tax advantage by writing off the interest of the loan on your taxes.
Most investor want to use the lenders money instead of their own to create more leverage, for other properties when looking to buy real estate. Borrowing money from a lender to provide cash flow or acquirer new assets is what we call good debit.
When purchasing a property, your credit history determines how much you are going to pay for the loan due to your FICO score. FICO scores are used by many mortgage lenders to determine the possibility that the borrower may or may not default on a financial obligation. The better the FICO score (credit history) the lower the interest rate, which means the lower payments and interest on the loan.
So, how do you get good credit score? Credit is established by how well you pay your bills which is reported back to the three major credit reporting companies, which are Experian, TransUnion, and Equifax.
These companies establish your FICO score or credit score by how well you make your monthly payments or by paying your bills off or on time. If there are no late payments, then your credit score will be high around 780 to 850.
The higher the credit score the better possibility that a lender will offer you a lower interest rate compared to someone that has a lower credit score.
If you do not pay your bills your credit score will fall for sure. Never spend, more than you can pay back. Managing your household budget is especially important when creating good credit. Being able to pay for your bills on time are the key to building good credit.
For young people, credit cards are the best and easiest way to establish credit. Go ahead and buy something small on a regular basis and make sure that you pay back the total monthly payment on time. This is a great way to build credit when you are young.
The higher FICO score, the lower the interest rate. For example, if you are going to buy a $250,000 home and you have good credit score let say (780) and the lender allows you to have a 3.5% interest rate for 30 years. Your house payment would be $1,122.00 and the total interest on the loan would be $154,140. The total cost of the home after 30 years with interest would be $404,140.
If you have poor credit and you seem not to pay your bills on time then the lender is going to give you let’s say a credit score of (680) andinterest rate of 4.75%, which brings your monthly payment to $1,304.00 with total interest on the loan of $219,481. after for 30 years. The total cost of this loan would be $469,481.
So, by having good credit compared to the other loan, you would have saved $65,341. on the interest and $65,520. on the monthly payments over the life of the loan for a total savings of $130,861.compared to the other loan. This is a significantly difference especially if you consider the total difference over the life of the loan which is thousands of dollars in savings,if you have a better interest rate.
The best way to find a lender is either through word of mouth or the internet. So, do yourself a favor, do the research for a good lender and keep yourself in good credit standings.
For more information on understanding wealth creation you can go to www.DiverseInvesting.com or purchase The Road Map to Investing on Amazon.
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