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For most people, paying for their dream house in cash is out of the question. And this is where mortgage loans come into the picture. Financing the purchase is the most practical way of getting their own homes. If you are thinking about taking out a mortgage loan to buy a home, especially if it’s your first home, one of the fundamental steps is figuring out how much house you can afford. It is also important to ensure that you are in a good enough financial position to make monthly mortgage payments.
When it comes to mortgage loans, you should note that your interest rate has a huge impact on how much you have to pay each month. This is why, in this article, we have provided 5 key tips to help you get the best mortgage rate.
Choose a Fixed-Rate Mortgage
There is a reason why fixed-rate mortgage loans are popular among aspiring homeowners. In a fixed-rate mortgage loan, you pay the same rate over the course of the loan. The initial interest rate on your mortgage remains the same, as opposed to an adjusted-rate mortgage. The majority of borrowers choose 30-year fixed-loan mortgages as they are more affordable and predictable. However, you can also go for other options like the 10, 15, and 25-year options.
In 2021, the mortgage interest rates were at a historic low – under 3% month over month. If anything, this was the best time to consider buying a home or refinancing a loan. Given the low-interest rates, you would have ended up paying significantly less in interest over the loan’s tenure.
However, the interest rates are projected to rise in 2022. In consideration of this, it is important to discuss how higher interest rates can affect your purchasing and refinancing opportunities. To get a better insight, here is a theoretical rate example: How much of a financial difference will a 4.00% interest rate make compared to a 3.75% interest rate?
Forbes found that over a 30-year loan term, the difference between a 4.0% and 3.75% interest rate is more than $5,000 per every $100,000 borrowed. Essentially, if you borrow a $300,000 mortgage loan at 3.75% interest, you will end up saving up to $15,000 over the life of the loan, which can be used for other purposes like:
A college fund
A downpayment on a new car
A downpayment on a second house
Investing in ETFs, stocks, and bonds
Hint: When looking to take out a mortgage loan, always look out for lower interest rates. While the rates are predicted to increase, now is still an ideal time to apply for a loan or refinance.
Build Your Credit Score
Most likely, you never realized the importance of building and maintaining a healthy credit score until you started using a credit card or applied for a car loan to finance your first car purchase. Having good credit is particularly important when it comes to borrowing from mortgage lenders. Before delving further, it is important to understand what constitutes your credit score:
Your payment history – 35%
Credit utilization – 30%
Duration of credit utilization – 15%
Number of inquiries – 10%
Credit types – 10%
Top Tips For Improving Your Credit Score:
Pay down big debts
Settle credit card balances
Pay bills on time
Check your credit report and correct any errors
Your credit score bears a lot of weight when it comes to determining whether you qualify for various types of loans. It is, therefore, crucial to ensure that you have the highest score possible. Remember that a high credit score gives you access to lower mortgage loan interest rates. Also, the lower your interest, the lower the amount you have to pay per month and over the course of your loan.
Lower Your Debt-to-Income Ratio (DTI) Ratio
In simple terms, your debt-to-income ratio is your monthly debt divided by your monthly income. From the resulting percentage, lenders are able to get an insight into your finances and affordability and gauge your risk level.
When it comes to using your DTI ratio as a determining factor, the lower it is the better your chances of qualifying for a mortgage. A lower DTI shows that you have less debt and your financial situation allows you to comfortably make monthly mortgage payments with less chance of defaulting on your loan.
How To Lower Your DTI:
Settle existing loans on time
Avoid additional debts during this period
Make extra payments
Increase Cash Flow
While a number of lenders will qualify you for a loan even with a higher DTI, it is best to ensure that it doesn’t exceed 36%.
Make a Bigger Down Payment
The amount you put down will play a big role in determining whether you qualify for the loan. Certain loan options won’t require you to put down any amount while some require that you put down at least 3%. When it comes to down payments, in most cases, the more you are willing to put down, the more the financing options you have access to. The smart move is always to save up as much money as possible for a downpayment.
Apply For An Adjustable-Rate Mortgage
As the name suggests, an adjustable-rate mortgage is a type of loan whose interest rate adjusts over the loan’s tenure (but after a fixed-rate period). Here, the borrower locks in a low mortgage rate for 5, 7, or 10 years after which the rate adjusts periodically. The changes in the interest rate are usually based on the existing market conditions. In traditional adjustable-rate mortgages, the interest rate changes after every 6 months. ARMs are popular among borrowers since they provide the lowest possible mortgage rates compared to 30-year fixed loan terms. Again, the lower your interest rate the lower the payments you have to make per month.
The lower rates and adjustable loan terms make adjustable-rate mortgages a more favorable choice for a variety of home-buyers including college graduates who also have student loans to pay, growing families, homeowners in temporary homes, people looking to relocate, borrowers seeking to refinance before the rate changes, as well as any individual planning to buy a house when the rates are higher.
This way, even if you feel as if you aren’t yet ready to purchase until next year, and the rates increase as forecasted, you consider an ARM. You should also note that ARMs let borrowers refinance their existing mortgage loans. Consider checking with your loan officer to see whether you can save money by refinancing before the adjusted-rate period starts.
Government Loans
An FHA loan is a mortgage loan backed by the Federal Housing Administration (FHA). This type of loan is more accessible than a conventional loan since FHA loans are guaranteed by the government. FHA loans offer the perfect option for aspiring homeowners with a lower credit score, and who don’t have enough money saved up for the 20% downpayment needed for standard loans. FHA loans typically require you to have a credit score between 500 and 579.
VA loans are loans backed by the U.S. Department of Veterans Affairs. VA loans offer military home buyers enticing loan terms and less stringent qualifying criteria. Generally, VA loans offer lower interest rates and let qualified borrowers finance up to 100%, without putting down any money. So, if you are in the military forces or are a veteran looking to buy a home, you should consider applying for a VA loan. To qualify for a VA loan, you must have completed at least 90 days of active duty service.
Morriera Team offers conventional mortgage loan options favorable to millennials, first-time homebuyers, as well as low-to-moderate income borrowers. You only need a downpayment of 3% to qualify.
Do Your Research, Prepare And Make Your Move
As you already know by now, your mortgage interest rate will adjust accordingly depending on the current market rates as well as a number of factors unique to you. Thus, if you think that it is the right time to purchase a new home – when the rates are low, or if you are just looking to learn more about your financing options for when the right time comes, get in touch!