Are you kicking yourself for not getting a historically low mortgage rate when they were in the 2s and 3s? If so, don’t! Committing to a mortgage is a huge life decision, and this may be a much better time in your life to make the jump from renter to homeowner. Besides, your opportunity for a good rate isn’t gone for good. It’s true that rates are no longer in a historically low spot, but they are still lower than what were seen before the housing market crash – and we’re talking about almost four decades, from 1971 to 2008! Compared to rates then, you still have the upper hand.
There’s more good news – You may have noticed some slight relief in mortgage rates lately. Mortgage rates that hit 6% are now starting to float down a bit, into the mid and low 5s. That means you can be approved to buy more house for your money than you could only a couple weeks ago. Like the economy, the mortgage market ebbs and flows, and maybe this is simply a better time in life for you to think about getting a first or new mortgage. Whatever the reason may be, housing is important, and you’re likely to want to get the most house you can for your money. We’re here to help with some tips to save more on a mortgage and get the best interest rate possible in the current climate.
Tip 1: Consider the mortgage type
It’s numbers crunch time. If you’re considering a new mortgage, take a holistic look at the money that you’re working with. Can you afford a 15-year mortgage? If so, you’ll likely be able to find lower rates on this shorter-term loan than a 30-year one. And, depending on your situation, you may find rates that are even lower than a 15-year term when you opt for an adjustable-rate mortgage (also known as an ARM). You’ll only want to go for an ARM product if it makes sense to you though, because rates are often fixed for only a handful of years, and then they adjust with the market, meaning that they could go up. If you’re looking to finance a place and know that you’ll only live there for five years, or you’re confident that you’ll be able to refinance before your rate hits its adjustment period, then this may be the best option for you.
As of our publication date, you can find average 30-year fixed mortgage rates at around 5.7%; 15-year fixed mortgage rates at around 5%; and some ARM products at around 4.3%.
Tip 2: Consider buying discount points
There’s another way to bring your potential interest rate down by using “discount points” (sometimes simply referred to as “points”). Points will cost you money upfront, though, so it’s not always a feasible or cost-effective option for everyone. When you pay for points, you can receive a lower interest rate, which means you’ll pay less over time. The tradeoff is between paying hefty closing costs upfront vs. spreading it out in your monthly payment over time. If you’re planning to keep your loan for a long time, like the common 30-year fixed rate mortgage, this could be an excellent option to help lower your rate now. Just note that there may be a limit to how many points you’re allowed to purchase.
You will see any points you pay for listed on your Loan Estimate (LE) and on your Closing Disclosure (CD). And though it can vary based on your lender, your type of loan, and market conditions, today’s current rule of thumb is that one point can decrease your rate by about .25%. If you’re interested in points, talk it over with your Loan Officer and ask them to shop around for you; they’ll be able to find you the best mortgage rate and point offering for your budget.
Tip 3: Manage your debt-to-income (DTI) ratio
How much debt can you handle? This is what your lender wants to know. Your debt-to-income ratio, or DTI, is your monthly expenses, divided by your pre-tax income. Lenders like to look at this number because it tells the story of how much you need to spend paying your other, non-mortgage debts each month and how likely you’ll able to pay the lender back.
To know your DTI, divide your monthly debt payments by your gross monthly income, and convert the result to a percentage. The lower the number you get from this calculation, the better.
Different loan types have different DTI requirements, and each approval is based on a case-by-case basis. But, we listed here some guidelines of max DTI percentage by loan type:
- FHA: 57% max DTI
- USDA: 41% max DTI
- VA: 60% max DTI
- Conventional: 50% max DTI
Tip 4: Watch your credit score
The first step to improving your credit score is knowing where it stands. You can get a free copy of your credit report once a year from AnnualCreditReport.com, which will have information from the three major credit reporting agencies that a lender also will look at: TransUnion, Equifax and Experian.
Once you have your hands on your credit report, ensure that there are no errors that you want to dispute. Unfortunately, these sometimes happen, so it’s in your best interest to employ your due diligence and verify the information being reported is correct.
The best way to keep your credit score in a healthy spot is to make on-time payments, always. This has the benefit of showing that you’re a reliable customer to your future lender, but it also helps you pay down your current debt, which will boost your DTI ratio.
And, though it is sometimes impossible, do your best to keep a $0 or ultra-low balance on any credit cards that you have. The temptation to rack up charges is sometimes too real, but these are charges that your lender is looking at when you apply for a mortgage. So, do you really need that pair of shoes in a third color, or can you save the money or even use it to pay down other existing debt? And, while you’re resisting the temptation to spend, keep in mind that you want to limit any new accounts that you open. So, pass on the 10% off one-time coupon you’d get for opening a new charge card at a specialized store. It’s not worth the hit to your credit score.
The bottom line
When you put effort and preparation into your situation before applying for a mortgage loan, your cost-savings benefits can be huge. The less you have to pay in interest on a mortgage means the more money you have in your pocket for other expenses, savings, investments, or whatever you value most. The interest rate you’ll be offered by a lender will greatly depend on the type of mortgage you apply for, your ability to use discount points or not, your debt-to-income ratio, and your credit score. There are other factors as well, but these four are greatly in your control. Once you do some of the financial work on your end, you can let your Loan Officer do the rest! They’ll shop mortgage interest rates for you and guide you on how to use your budget to your advantage. When you’re ready to apply for a mortgage, or get pre-approved, Homespire can help.
This is not an offer for a loan or any type of extension. Eligibility for a loan or extension of credit from Homespire Mortgage Corporation is subject to completion of a loan application, credit, income, and employment qualification, and meeting established underwriting criteria. Rates are subject to change without notice based on market conditions. See Loan Consultant for information on program income limits, buyer contribution, area median income, debt requirements, and other application details.