For years, mortgage rates have remained unusually low. However, 2023 brought inflation and economic instability, causing fluctuations in mortgage rates akin to a roller coaster ride. Even industry experts find themselves at odds over where the rates are headed next.
During such market instability, both potential homebuyers and sellers have cause for concern. As MarketWatch.com suggests, it's plausible that interest rates could keep climbing. Therefore, locking in your current rate before another increase might be a wise decision. With some foresight, you can position yourself to qualify for the most favorable mortgage rate, and perhaps even refinance at a lower rate down the line.
The interest rate you secure has a substantial influence on your monthly payments, offering the potential for significant savings over the life of a 30-year mortgage.
So, how do you secure the most advantageous interest rate? Here are eight strategies to help you economize:
1. Secure Consistent Employment.
Having a stable job is a strong signal of reliability, which is something that credit institutions value highly. If you're in the market for a home, now may not be the best time for a significant career change. Frequent job shifts or employment gaps could negatively affect your credit rating and your capacity to borrow.
Mortgage lenders usually scrutinize your employment and earnings over the past two years. A consistent job and regular income can make you eligible for more favorable interest rates. While promotions or job changes within the same field are generally safe moves, especially if they demonstrate a stable income, other transitions, like going from a W-2 employee to a 1099 independent contractor, could jeopardize your mortgage prospects more significantly.
2. Boost Your Credit Score.
A strong credit score portrays you as a less risky bet for lenders. It shows that you have a history of paying your debts promptly and managing your finances wisely. When your credit report is pulled, lenders see you as a creditworthy borrower with a minimal chance of defaulting on a mortgage.
Those with superior credit scores usually receive the lowest interest rates. A credit score ranging from 690 to 800 is generally considered good. If you're unsure of your current score, many banks and credit card companies provide free access to it.
Rectify Credit Report Errors: Instantly enhance your score by correcting any inaccuracies on your credit reports. AnnualCreditReport.com is a no-cost platform where you can do this.
Minimize Your Current Debt: Begin by focusing on credit card debt and any home equity lines of credit you may have.
Retain Older Credit Card Accounts: Keeping older, good-standing accounts open benefits your credit score by preserving the length of your credit history and your overall credit limit.
Never Miss a Payment: Your payment history is a crucial factor affecting your credit score.
Limit Credit Inquiries: When you're in the market for a home loan, avoid making numerous credit applications, as this could negatively affect your score. If you’re also considering an auto loan, try to restrict your applications to a two-week window.
Adhering to these strategies over time will naturally improve your credit score, thus making you eligible for more competitive mortgage rates.
3. Tackle Your Debt-to-Income Ratios
A high credit score and solid employment are great, but lenders will hesitate if your debt-to-income (DTI) ratios are off-balance. The higher your debt, the less you can afford in terms of mortgage. If you have eyes on a pricier property, focus on reducing your debt before applying for a mortgage. There are two DTI ratios to consider:
Front-end Ratio: This refers to the percentage of your monthly pre-tax income designated for housing costs. Ideally, this should be 28% or lower.
Back-end Ratio: This covers all your monthly debt obligations, including housing, credit cards, student loans, etc. Aim for 36% or lower.
Lower your DTI ratios either by opting for a less expensive home or boosting your down payment. Additionally, paying down existing debt and increasing your monthly income will help. Two-income households often have the upper hand, so include income from all parties when applying for a loan.
4. Opt for a Heftier Down Payment
Lenders favor borrowers with more skin in the game, as they're less likely to default. If possible, aim for a 20% down payment. This not only reduces your interest rate but also eliminates the need for Private Mortgage Insurance (PMI).
A bigger down payment will also lessen your overall borrowing costs and bring down your monthly payments. However, don't forget to reserve some cash for closing costs, moving, and settling into your new home.
5. Choose the Ideal Mortgage Type
Different loans offer distinct advantages and disadvantages based on your credit score, job history, and down payment size. Some common loan types include:
Conventional: Lower rates but strict credit and down payment rules.
FHA: Government-backed and easier to qualify for but typically come with higher rates.
Specialty Loans: VA or USDA loans require specific qualifications.
Jumbo: These exceed conforming loan limits and often have more stringent requirements.
Also, evaluate fixed versus adjustable-rate mortgages:
Fixed Rate: Offers stability and predictability, and it's the most popular choice.
Adjustable Rate (ARM): Initial lower rates, but they can increase later on.
6. Opt for a Shorter Loan Term
Although 30-year mortgages are popular, a shorter term like 15 or 20 years will save you money on interest and often comes with lower rates. Make sure the monthly payments are within your budget.
7. Shop Around for Rates
Always obtain quotes from a variety of lenders. Some borrowers also choose to use a mortgage broker, who can help find the best rates but may charge a fee. Understand their compensation structure and compare different brokers' services.
Even though mortgage rates have climbed from their historic lows, they are still well below historical averages. Prices are expected to continue to rise, making now an ideal time to get into the market. If you'd like more personalized advice, please reach out for a free consultation. We can help you navigate this fluctuating market to achieve your real estate goals.