The dream of every family is to own their own house. Indeed, in the States it’s known as The American Dream. In the early years, after WWII, men and women took on debt sparingly. They lived within their means. They saved for their down payment first and then bought their house. Today many people just get a top loan to cover the cost of the down payment. Without realizing it, they end up paying thousands of dollars extra in interest and fees because they haven’t planned ahead of time. Planning ahead of time will get them the idea low interest home loan.

Saving for a down payment can reduce the cost of a home loan by thousands of dollars. Indeed a $300,000 loan can end up saving nearly half a million dollars over the lifetime of a loan. Many banks reduce the interest rate on a loan depending on the amount of the down payment, further saving even more. This applies not only to a mortgage, but to low interest home equity loans as well (see below for more information about why an equity loan will help consolidate debt).

Not only does planning early help save for the down payment, it also helps for finding a lender with the best interest rates and term conditions. Many people make the mistake of going with the first lender they come across because they aren’t aware of better terms and rates. Having the time to shop around is imperative when one is about to undertake a loan that costs hundreds of thousands of dollars.

There are a few things a bank looks at when assessing an interest rate, down payment and amount to lend. There is the FICO score (a score based on your credit history), the debt to income ratio, your total income and any recent loan applications. All of these things combined determine what kind of interest rate you’ll receive, what the down payment percentage will be required and how much to lend.

Planning ahead doesn’t only mean saving and shopping around, it also allows one to increase your credit score. One way of doing that is to pay off all the debts possible. A great way to do this is to consolidate all of the debt to one low interest home equity loan.

Another, better, option is to reduce the debt to income ratio. That means reducing your total debt to income by less than 36%. The way to calculate your debt to income ratio is to calculate all of your debts that are recurring (this is just what you owe, not what you pay monthly to live; i.e. ignore grocery, utilities and things of that nature) and divide that by your total monthly income (spouse included if you both file together). The lower the figure, the lower your interest rate on the loan.

The more time you spend planning for your loan, the more money you will save in the long run. Everything about loans is based on time. The time to lower your debt to income ratio, the longer you’re in your job, the more timely payments you make on other credit and the more money you save for your down payment will all play a key role in getting you a low interest rate. Once you understand how your credit works, it’s easy to get low interest home improvement loans, car loans, credit cards and more.

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