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Let’s face it, very few people can actually afford to buy a home in cash. And this is one of the primary reasons why mortgage loans exist. For most people, home financing is the most feasible way of owning a home. If you are planning on applying for a mortgage, you first need to figure out how much home you can afford. You also need to be well prepared and comfortable with making monthly mortgage payments.
Keep in mind that your mortgage interest rate will have a huge influence on your monthly payments. Thus, determining how you will get the most value for your money (both home and payment-wise) will help save you a lot of money and stress in the future.
Consider A Fixed-Rate Mortgage
The majority of aspiring homeowners prefer the fixed-rate mortgage loan option. In this setup, the rate remains the same throughout the life of the loan. What this means is that you will be paying the same amount every month, as opposed to an adjusted-rate mortgage. Most borrowers will go for a 30-year fixed thanks to its affordability and predictability. However, there are still other options like the 25, 15, and 10-year options.
The most recent data indicates that interest rates were at an all-time low in 2021, sitting below 3.0% month over month. This was essentially the most ideal time in the market to purchase a home or refinance. Thanks to the lower rate, you will end up paying back a lot less in interest over the course of the loan.
Unfortunately, the rates are expected to increase in 2022. With this in mind, let’s take a look at how higher interest rates affect refinancing and buying opportunities for borrowers. Here’s a theoretical rate example. Will a 4.00% interest rate make any significant financial difference compared to a 3.75% interest rate? Short answer: Yes!
Forbes estimates that over the life of a 3o-year loan, the difference between a 3.75% rate and 4.0% interest rate translates to more than $5,000 for every $100,000 borrowed. This means that if you take out a $300,000 mortgage loan, you can end up saving up to $15,000 over the course of the loan, which you can use for:
A downpayment on a second home
A downpayment on a new car
A college fund
Investing in bonds, stocks, ETFs and more
The Take-Away: If you are looking to borrow, look out for lower interest rates. Even though the interest rates are expected to rise, now is still a great time to consider applying for a home loan or refinancing.
Improve Your Credit Score
Chances are, the importance of establishing and maintaining a good credit score finally dawned on you at some point in your life. Perhaps it was when you started using a credit card or when you applied for an auto loan to purchase your first car. Regardless, knowing how credit affects your ability to borrow money, particularly from mortgage lenders, is very important. First, let’s take a look at what your credit score entails:
Types of credit -10%
Number of inquiries – 10%
Length of credit utilization – 15%
Credit utilization – 30%
Payment history – 35%
How to increase your chances of a mortgage loan approval (Credit edition):
Make all bill payments on time
Fully pay credit card balances
Reduce major debt
Review your credit report and check for any errors listed on the report
Given that your credit score is among the most important risk determining factors used by lenders, it helps to ensure that you have the highest score possible to present. Keep in mind that as with many other loans and lenders, the higher your credit score, the lower the interest rate charged. And again, the lower the interest rate the lower your monthly mortgage payment.
Reduce Your Debt-to-Income (DTI) Ratio
An individual’s debt-to-income ratio is basically their monthly debt divided by their monthly income. The resulting percentage evinces your finances and affordability.
Using your debt-to-income ratio, mortgage lenders are able to gauge your risk level. Basically, what all of this means is that you stand a better chance of mortgage approval when you have a lower DTI. This is because it is usually an indication that you have less debt and are in a good enough financial position to make monthly mortgage payments and a less chance of defaulting on your loan.
Here are some expert tips on how to lower your DTI:
Increase cash flow
Avoid getting into more debt
Pay off your existing loans on time
Make extra payments
Some lenders do accept higher DTIs, depending on the type of loan. However, it is best to ensure that your DTI is under or just below 36%.
Determine Your Down Payment
Lenders also consider the amount of money you put down on the house when determining whether you should qualify for a loan. Some loan options don’t require you to put down any amount and there are some that require a minimum 3%. In some cases, the more you are willing or able to put down, the more the financing options available to you. The general rule of thumb as a smart homebuyer is always to save up as much money as possible for a downpayment.
Go For An Adjustable-Rate Mortgage
Adjustable-rate mortgages, or simply ARMs, are a type of mortgage whose interest rate changes over the course of the loan – but after a fixed-rate period. In this arrangement, the borrower locks in a low mortgage rate for 5, 7, or 10 years, then the rate adjusts periodically going forward. These changes will be based on the current market conditions at the time.
With a traditional ARM, the interest rate adjusts after every 6 months. What makes ARMs particularly attractive to borrowers is the fact that they offer the lowest possible mortgage rates, as compared to 30-year fixed loan terms. In general, lower interest rates translate to lower payments per month.
Thanks to the lower rates and adjustable loan terms, this type of loan is ideal for a range of home-buyers including college graduates who need to pay off debt, homeowners in temporary homes, growing families, borrowers seeking to refinance before the rate changes, someone who is planning on relocating, or anyone looking to purchase a house when the rates are higher.
Thus, if you feel like you aren’t yet ready to buy until next year, and the rates increase as projected, you can consider an ARM. It is worth noting that ARMs also allow borrowers to refinance. Most borrowers check with their loan officer to find out whether ther are any opportunities to save money by refinancing before the adjusted-rate period starts.
Government Loans
An FHA loan is a mortgage guaranteed by the Federal Housing Administration (FHA) – a federal agency within the Department of Housing and Urban Development. FHA loans are more accessible to borrowers than conventional loans since they are backed by the government. An FHA loan could be an ideal option if you have a lower credit score, want to put down less money, and don’t have enough money saved up for the 20% down payment required for conventional loans.
A VA loan is a type of loan guaranteed by the U.S. Department of Veteran Affairs meaning we offer more attractive loan terms and less stringent qualifying criteria to military home buyers. Typically, VA loans have lower average interest rates and allow borrowers to finance up to 100%, with no money put down.
Moreira Team is a conventional mortgage loan program ideal for millennials, first-time homebuyers, and low-to-moderate income borrowers. It requires a downpayment of just 3%.
Find more types of loans here.
Research, Prepare And Make Your Move
By now, you already know that your mortgage rate will vary significantly depending on the current market rates and a range of factors unique to you. So, if you are finally ready to buy now when the rates are still low or just want to learn more about your financing options for when the time comes, contact us.