For many years mortgage rates have been abnormally low. But in 2022, inflation and economic uncertainty caused markets to rise and fall sending mortgage rates on a roller coaster. Even the experts are divided when it comes to predicting where rates are headed next.¹

When markets are volatile, it is concerning for homebuyers and sellers, and according to MarketWatch.com, interest rates very well could continue rising, so now might be a good time to lock in your rate before rates go up again. With a little planning you can improve your chances to qualify for the best mortgage rate available – and open up the possibility of refinancing at a lower rate in the future.

Your interest rate has a significant impact on your monthly payment, and can save you lots of money over the course of your 30 year mortgage.

Let’s compare a 5.0% versus a 6.0% fixed-interest rate on a $500,000 home, over a 30-year term. ²

With a 5% rate, you would save $738 per month on your monthly mortgage. Over the course of a 30 year period, your savings would be $151,619! In other words, shaving off just one percentage point on your mortgage could put nearly $150K in your pocket over time.

So, how can you get the best interest rate available? Here are eight tips to help you save money:

1. Maintain a Steady Job.

Steady employment is a key indicator of stability, and credit companies like to know you are reliable. If you are preparing to purchase a home, you probably don’t want to make a major career move. Job moves or gaps in your résumé could hurt your credit score and borrowing ability.

Mortgage lenders will typically review the last 24 months of your employment and income.⁵ If you’ve had a steady job with a consistent paycheck, you will qualify for a better interest rate.

Don’t be afraid of accepting a promotion, or even changing companies, as long as you can show a consistent monthly income. But some moves, like switching from W-2 to 1099 (independent contractor) income, could impact your home borrowing plans more than others.⁶

2. Increase your credit score.

A high credit score means you’re seen as a safer option for lenders. You have a track record of paying your bills on time and don’t overextend your financial resources. When lenders pull your credit, they see you as a responsible borrower with a low risk of mortgage default.^3.

Borrowers with higher credit scores are offered lower interest rates. A good credit score is between 690 and 800.⁴ If you don’t know your score, check with your bank or credit card company to see if they offer free access.

If your credit score is low, you can improve it using the following steps, including:⁴

• Correct any errors on your credit reports, this will instantly improve your score. AnnualCreditReport.com provides a free resource to do this.

• Reduce the amount of debt you currently owe. Start with credit cards, and any home equity lines of credit.

• Keep old credit card accounts in good standing open. If you close old accounts it could lower your score by shortening your credit history and shrinking your total available credit.

• Make sure all your payments are on time. Payment history is a top factor to determine your credit score.

• Avoid additional credit applications when you are searching for a home mortgage. You can ding your score by having too many credit inquiries. If you’re shopping around for a car loan, limit your applications to a short period, two weeks is best.⁵

Over time, if you follow the steps above, your credit score will increase over time. This will help you qualify for a lower mortgage rate.

3. Reduce your debt-to-income ratios.

Even if you have a high credit score and a great job, lenders will be concerned if your debt to income ratio is to high. The more debt you have, the lower amount you can afford for your mortgage. If you want that expensive house, make sure you reduce your debt before applying for your mortgage.

There are two types of DTI ratios:⁷

1. Front-end ratio — the percentage of your gross monthly income that will go towards covering housing expenses (mortgage, taxes, insurance, and dues or association fees). A good front-end DTI ratio is 28% or lower.⁷
   

2. Back-end ratio — The percentage of your gross monthly income will go towards covering ALL debt obligations (housing expenses, credit cards, student loans, and other debt). A good back-end DTI ration is usually 36% or less.⁷

You can reduce your DTI ratios by reducing the cost of your home purchase, or, increasing the size of your down payment. If your back-end ratio is too high, make sure you pay down your existing debt. You can also increase your monthly income. Keep in mind, two income families have an advantage. Make sure you include your income from both parties when applying for your loan.

4. Increase your down payment.

Why do mortgage lenders care about your down payment size? Because home buyers with significant equity in their homes are less likely to default on their mortgages.

If you can afford it, it is highly recommended to put 20% down payment on your home. Having 20% equity in your home will reduce your interest rate on your mortgage, and it will remove the Private Mortgage Insurance that Conventional Lenders require if your equity is less than 20%.⁸

A larger down payment will also lower your overall borrowing costs and decrease your monthly mortgage payment since you’ll be taking out a smaller loan. Just be sure to keep enough cash on hand to cover closing costs, moving expenses, and any furniture or other items you’ll need to get settled into your new space.

5. Pick the right loan type.

There are different types of mortgages. The loan type you choose could save (or cost) you money depending on your credit score, employment history, and down payment size.

For example, here are several common loan types available in the United States today:⁹

• Conventional — These offer lower interest rates but have strict credit requirements and down payment requirements.

• FHA — These loans are backed by the government, and are easier to qualify for, but typically have higher interest rates.

• Specialty — Certain specialty loans, like VA or USDA loans, are available to you if you meet certain requirements.

• Jumbo — Jumbo mortgages are large loans that exceed the local conforming loan limit, and are subject to additional requirements and usually have higher interest rates.¹⁰

When evaluating loan types, you’ll also want to consider the pros and cons of a fixed-rate versus variable-rate mortgage:¹¹

• Fixed rate — With a fixed-rate mortgage, you are guaranteed to keep the same interest rate for the entire life of the loan. Fixed rate mortgages are the most popular loan type, because they are stable, and predictable.

• Adjustable rate — Adjustable-rate mortgages, or ARMs, offer home buyers a lower introductory interest rate than fixed-rate mortgages, but the rate can rise after a set period of time — typically 3 to 10 years.

According to the Mortgage Bankers Association, as of September 2022, 10% of American homebuyers are selecting ARM mortgages. This is up from 4% at the start of 2022.¹² If you are planning to sell your home before the rate resets, an ARM might be a good option for you. Or, if you think rates are going to decrease in the future, an ARM might be worth considering.

6. Shorten your loan term.

A mortgage term is the length of time your mortgage agreement is in effect. The terms are typically 15, 20, or 30 years.¹³ Although the majority of homebuyers choose 30-year terms, if your goal is to minimize the amount you pay in interest, you should crunch the numbers on a 15-year or 20-year mortgage.

With shorter loan terms, the risk of default is less, so lenders typically offer lower interest rates.¹³ Just make sure you can afford your monthly payments before selecting a shorter mortgage term.

7. Compare interest rates from multiple lenders.

When shopping for a mortgage, be sure to get quotes from different lenders and lender types to compare the interest rates and fees. Some Lenders may offer a better deal for the type of loan and term length you want.

Some borrowers choose to work with a mortgage broker. Like an insurance broker, they can help you gather quotes and find the best rate. However, if you use a broker, make sure you understand how they are compensated and contact more than one so you can compare their recommendations and fees.¹⁴

If you are working with a builder, frequently offer interest discounts if you work with their lender. This can be a bit risky however, make sure you understand how they are compensated, and make sure there are no surprises. When dealing with such a large transaction, I personally prefer and recommend to hire a lender who works directly for you.

Don’t forget that we can be a valuable resource in finding a lender, especially if you are new to the home buying process. After a consultation, we can discuss your financing needs and connect you with loan officers or brokers best suited for your situation.

Getting Started

The historically low interest rates we saw during the height of the pandemic are behind us. However, today’s 30-year fixed rates are still far below the historical average of 8%, and are well below the all-time high of 18.45% in 1981.¹⁶

And although higher mortgage rates have made it more expensive to finance a home purchase, they have also eliminated some of the competition from the market. As a result, today’s buyers are finding more homes to choose from, with less competition, and more sellers are willing to negotiate or offer incentives to sell their home. This makes it still a perfect time to review your finances in detail and determine the pulse of the city/neighborhood you are interested in.

If you’re ready to buy a home, there’s no reason that concerns about mortgage rates should keep you from moving forward with those plans. The reality is that many economists predict continued rate hikes and that home prices will also continue to rise.¹⁸ So you may be better off buying today at a slightly higher rate than waiting and paying more for a home a few years from now. You can always refinance if mortgage rates go down, but you can’t make up for the lost years of equity growth and appreciation.

If you would like more information about buying or selling a home or have any questions, please contact us to schedule a free consultation. We’d love to help you weigh the pros and cons in this ever-changing market and reach your real estate goals!

Sources:

1. Market Watch -
   https://www.marketwatch.com/picks/as-mortgage-rates-tick-upwards-8-secrets-to-getting-the-lowest-mortgage-rate-possible-for-you-01647009008

2. Mortgage Calculator -
   https://www.mortgagecalculator.org/

3. RocketMortgage –
   https://www.rocketmortgage.com/learn/what-is-a-credit-score

4. Chase Bank -
   https://www.chase.com/personal/mortgage/education/financing-a-home/ways-to-reduce-mortgage-rates

5. Experian -
   https://www.experian.com/blogs/ask-experian/how-to-get-lower-mortgage-interest-rate/

6. CNBC -
   https://www.cnbc.com/2022/07/11/mortgage-rates-have-surged-heres-how-to-get-a-lower-rate.html

7. Nerd Wallet -
   https://www.nerdwallet.com/article/mortgages/get-the-best-mortgage-rates

8. Fool.com -
   https://www.fool.com/the-ascent/mortgages/lower-mortgage-rate/?awc=12195_1664207882_2e794e96bbab92edbb9dc06ff8ccdcaf&campaign=101248&pc_source=TheMotleyFool_Awin&utm_source=aw&utm_campaign=101248

9. NerdWallet -
   https://www.nerdwallet.com/article/mortgages/payment-buy-home

10. Consumer Financial Protection Bureau -
    https://www.consumerfinance.gov/owning-a-home/loan-options/

11. NerdWallet -
    https://www.nerdwallet.com/article/mortgages/jumbo-loans-what-you-need-to-know

12. Bankrate -
    https://www.bankrate.com/mortgages/arm-vs-fixed-rate/

13. MarketWatch -
    https://www.marketwatch.com/picks/as-mortgage-rates-rise-heres-exactly-how-more-homebuyers-are-snagging-mortgage-rates-around-4-01656513665

14. Consumer Financial Protection Bureau -
    https://www.consumerfinance.gov/owning-a-home/loan-options/#anchor_loan-term_361c08846349fe

15. Rocket Mortgage -
    https://www.rocketmortgage.com/learn/buydown-mortgage

16. Bankrate -
    https://www.bankrate.com/mortgages/mortgage-points/

17. CNBC -
    https://www.cnbc.com/select/mortgage-rates-today-still-relatively-low/

18. Rocket Mortgage -
    https://www.rocketmortgage.com/learn/historical-mortgage-rates-30-year-fixed

19. MarketWatch -
    https://www.marketwatch.com/picks/continuing-home-price-deceleration-heres-what-5-economists-and-real-estate-pros-predict-will-happen-to-the-housing-market-this-year-01659347993