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How to Get Better Mortgage Rates

by Tim

Reducing mortgage interest rates can impact the total amount you repay for the loan. While lowering mortgage market interest rates may be challenging, you can affect the rate you receive on your loan in several ways. For instance, you can make larger down payments or select a shorter loan term.

High interest rates scare many people off the home market, especially when their income is unstable. However, you can manipulate the rates to suit your financial situation before applying for a mortgage. Stabilizing your employment records is among the best ways to impact your rates.

Here are some tips to get better mortgage rates.

Check and Improve Your Credit Score

Your credit score indicates your creditworthiness and determines your loan rates and terms. You can earn high scores by demonstrating responsible credit usage. Lenders readily extend credit to borrowers with high scores since they view them as low-risk.

Here are some credit score categories:

  • Poor: less than 580
  • Fair: 580 to 669
  • Good: 670 to 739
  • Very good: 740 to 799
  • Exceptional: 800 and above

You can confirm your credit score by requesting a free credit report from the relevant credit reporting companies, banks, and other financial institutions. Some credit cards and banks also provide credit score access.

Save a Good Down Payment

A large down payment may qualify you for lower interest rates. Putting down more money means more equity in your property and less risk for the lender. While you can access mortgages with as low as a 3% down payment or no down payment, a down payment will save you considerable money in the long run.

In addition to the lower interest rates, a 20% or more down payment will help you avoid private mortgage insurance (PMI). To help you with this process, working with a mortgage agent to achieve your goal is best.

Reduce Your Debt-to-income Ratio

Debt-to-income ratio (DTI) compares the money you owe and make. It compares your debt payment monthly to your gross monthly income. A DTI of 36% is best for better interest rates. Many lenders avoid mortgages that require more than 28% of your monthly income.

Therefore, if your monthly gross earnings are $5000, your mortgage plus other debts should be $1800 or less, with $1400 or less going to the mortgage. Nevertheless, some lenders accept even a 50% DTI, but high interest rates. There are two ways to reduce your DTI.

Increase Your Income

Increasing your income reduces your DTI and interest rates. You can achieve this by asking your employer for a promotion or a salary rise. You can also consider a side hustle or a part-time job.

Reduce Your Debts

Pay off as many credit cards and loans as possible. Paying off an outstanding loan means the balance will not affect your DTI. There are various strategies to get out of debt, including the debt avalanche and snowball methods.

Steady Employment Record

Demonstrating a steady employment history of at least two years with a stable income, especially from the same employer, makes you more attractive to lenders. Be ready to present your pay stubs for at least one month and your W-2 for the last two years before applying for a mortgage. Provide proof of all bonuses and commissions if available.

Self-employment or income from several part-time jobs may make it challenging but possible to qualify for a mortgage, especially at low interest rates. You can boost your chances by providing your business records, such as P&L statements and tax returns.

If you are returning to the workforce after some time away or are a graduate starting, lenders can verify your employment if you have a signed job offer that includes your income. Lenders might also flag your application if you are switching to a new job in a completely different industry from your current employment.

Short-Term and Long-Term Mortgages

Short-term mortgages offer better interest rates than long-term ones. Therefore, if you find a long-term home and your cash flow is steady, consider a 15-year fixed-rate mortgage instead of a traditional 30-year fixed-rate one.

Lenders charge high interest rates for long-term loans due to their risks. For example, a long period means your employment and income situations could change, affecting your repayment capabilities.

Although you will pay more monthly installments in the latter, you will clear your loan faster and at lower interest rates. A 15-year term is also helpful when refinancing your old mortgage.

Adjustable-Rate Mortgages

Alternatively, an adjustable-rate mortgage (ARM) would be best if the rates are high. With these loan types, you start with a fixed rate for a given time, usually five to seven years.

The rates here are typically lower than in fixed-rate mortgages. Your loan then switches to adjustable terms, meaning rates can shift upwards or downwards for the remaining loan term. When the rates are low, you can refinance your ARM loan to a fixed-rate mortgage.

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