Interest rates are approaching an all-time high in response to the Federal Reserve’s measures to encourage consumer spending. The Fed issued emergency rate cuts in March as a preemptive strike against a plummeting market in the wake of COVID-19.
Although the Federal Reserve does not set mortgage rates, their decision will affect a variety of spending tools, including Mortgages. If you are thinking about taking advantage of lower interest rates, here are a few things to keep in mind.
Boutique, boutique, boutique
One of the biggest mistakes homebuyers make is not looking for the best mortgage terms. Many accept the first lender who agrees to offer them a home loan without knowing if they could get a lower interest rate, fewer fees, or different repayment terms. To see what type of rate you qualify for today, Discover this free online tool.
A common misconception is that shopping around for a mortgage rate can hurt your credit score. While too many inquiries about your credit report can lower your score, credit rating agencies will group similar inquiries together, so buying a car loan or home loan is less likely to cause a significant drop in your credit score.
Use a comparison website, like Credible, to examine different lenders and compare fees, rates and repayment terms to determine which lender offers the best deal for your family.
Get your credit in order
To benefit from the best interest rates, you will need a credit rating of at least 700. While you might qualify for an FHA loan with a score in the 500’s, many lenders are tightening their requirements and increasing their interest rates for borrowers with lower scores. If you are confident in your credit score, consider moving forward with using Credible to compare rates and see what type of loan you are eligible for.
If you need increase your credit score focus on the following areas to have the greatest impact:
- Total debt balances against available credit (how many of your lines of credit are you using)
- Debt-to-income ratio (how much of your monthly income is spent on debt)
- Payment history (How often are you late? Do you have invoices in collection?)
- Errors or inaccuracies (are there any accounts reporting incorrect balances or payment histories?)
Make up your deposit
While the Federal Reserve has cut interest rates to encourage consumer spending, many lenders are raising their lending standards. Credit companies know the economy is fluctuating right now and they want to protect their investments. To increase your chances of qualifying for better interest rates, take the time to save at least 20% for a advance payment. If your credit score is lower, you may want to consider saving even more.
If you provide at least 20% toward the purchase of your home, your lender likely won’t need private mortgage insurance, which can also lower the cost of your mortgage payment.
Consider a different term of 30 years
A The 30-year mortgage is a popular option for many homebuyers because the monthly payments are smaller. However, longer repayment terms usually result in higher interest rates, which means that the total cost of the house over the life of the loan is higher.
For example, take a mortgage loan of $ 250,000.
The first option is a 30-year fixed rate loan at 4.5%. The monthly payments for this loan would be approximately $ 1,267. The total interest paid over 30 years would be $ 206,017.
The second option is a 15-year fixed rate loan at 4.5%. Monthly payments on this option would be $ 1,913. The total interest paid over 30 years would be $ 94,247.
The 15-year loan costs over $ 100,000 less, and that doesn’t account for a potentially lower interest rate you’d likely be entitled to, as lenders view shorter repayment terms as lower risk. .
Discover the Credible loan calculator to get numbers for your specific situation.
Have a stable income / job
Lenders look for borrowers who have a stable job or a constant source of income. They want to make sure they get their money back. Lenders will ask for a two-year income history. Income history includes pay stubs, tax forms, and employment history. If there are any interruptions in your employment, you will need to be in your current job for at least six months.
In summary, borrowers who meet the following criteria are more likely to qualify for the best interest rates:
- Stable employment for at least the last six months
- 20 percent or more to put for a down payment
- A credit score of at least 700
- Clean up credit history
- Ready to consider a 15-year loan
- Buy a house in an affordable neighborhood
You may still qualify for a mortgage even if you don’t meet all of these conditions, but you will likely have higher interest rates. Use a comparison tool, like Credible, to find lenders in your area who offer the best rates.