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If you have been watching the news lately, you may have heard a lot about rising mortgage rates. It is true that interest rates have gone up significantly in 2022 as the Federal Reserve tries to battle the inflated economy. However, higher average mortgage rates do not necessarily mean it’s a bad time to buy a home or refinance your existing home loan.
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Not All Mortgage Rates are the Same
Remember that the news is just talking about average mortgage rates and the numbers can be skewed based on unreliable data sources. Interest rates will vary from borrower to borrower, from lender to lender, and from loan to loan. The mortgage rate you qualify for will depend on a number of different economic factors. Yes, the prevailing average interest rates will have a clear impact, but your personal financial standing will really be what determines your qualified mortgage rate.
Whether the real estate and mortgage markets are up or down, it’s rarely ever a bad time to buy a home. The long-term benefits and tax savings of homeownership are almost always worth the investment. You may pay a higher rate now than you would have a couple years ago when mortgage rates were at their lowest, but you may also find a better deal on a great home that would have been nearly impossible to buy when there was so much more competition in the market.
The real estate and mortgage markets are always cyclical. Home values and mortgage rates are relative. In the long run, homeowners generally benefit as long as they keep up with mortgage payments, property taxes and other homeownership expenses.
If you are planning to buy a home or refinance your current home loan, you will want to take some steps to ensure you qualify for the lowest possible mortgage rate. Just because the average rates are a little higher right now doesn’t mean you can’t lock in a lower interest rate if you have a strong financial standing. Having your finances in order is the best way to qualify for a lower mortgage rate.
Here are a few financial improvements you can work on before you apply for your home loan:
Your credit score will play a large part in determining your mortgage interest rate. Mortgage lenders will run credit checks to see your current rating. A higher credit score shows you present less risk as a borrower and this can help you qualify for a lower rate. If you have a low credit score or have established one yet, don’t worry. There may still be mortgage loan solutions available to you.
Your mortgage lender will also review your current income situation and employment history. If you have a steady income and make good money, it will help you when applying for a mortgage loan. Self-employed borrowers will need to show how and where they make their money to prove they have a healthy and dependable income. Lenders want to see that you will be able to afford your mortgage payments each month. A higher income and steady income/employment history will also help you qualify for a lower mortgage rate.
Next comes the down payment. This is how much cash you are willing and able to put down upfront toward your mortgage loan. Mortgage borrowers with lower down payments may end up paying higher mortgage rates. They are borrowing more principal and this will lead to a higher fixed interest rate. Ideally, you should save up for a down payment of at least 20% of the property’s value to ensure a lower mortgage rate.
Some special loan programs like FHA loans, VA loans and USDA loans can allow you to pay a lower down payment and still get competitive rates. However, a higher down payment can lower your rate even more and also reduce or eliminate mortgage interest (PMI) requirements.
Another very important factor reviewed by your mortgage lender will be your existing debt. They will look at money you are already borrowing to see if you can afford your monthly mortgage payments. This will include any personal loans, student loans, car loans, credit card balances and any other debts on your record. They will calculate your debt-to-income (DTI) ratio and this will be another determining factor when it comes to your qualified mortgage rate.
Fixed-Rate vs. Adjustable-Rate Mortgages (ARMs)
When the prevailing mortgage rates are higher, you may start seeing more opportunities to apply for an adjustable-rate mortgage (ARM). Most home loans are 30-year fixed rate loans, which means you pay the same interest rate over the life of the loan. An ARM means that your mortgage interest will be adjusted each year based on the prevailing interest rates. It could go up or down, depending on what the average rates are doing. This can be a smart option during a period when mortgage rates are high because there is a chance they might come back down in the years to come.
However, there is always some gamble associated with ARM loans, which is why they are less common than fixed-rate mortgages. The rates could go up and you could end up paying more.
It is recommended you talk with your mortgage broker or lender to see which loan programs are right for you and to see what kind of mortgage rate for which you can qualify. You should aim to get your finances in order before applying and then go through the mortgage pre-approval process to lock in your lowest possible rate before you start searching for homes. Pre-approval will show you how much you can afford to borrow and will help you look like a better buyer when making purchase offers to home sellers.
For all your mortgage needs turn to the Moreira Team. Our team can help answer any questions you have and get pre-approved for your home loan with the lowest possible mortgage rate.