After falling to historic lows, mortgage rates may be climbing once again. But if you're thinking of buying now, have you waited too long to get a mortgage with a reasonable interest rate? Not at all! Rates are rising, but they're still low - especially compared to rates of the past. And when you follow these five steps, you'll get the lowest rate you can on your next mortgage.
1) Build Your Credit
The best way to improve your mortgage interest rate is to improve your credit, because FICO credit scores remain one of the biggest deciding factors for mortgage lenders to determine your credit worthiness. All borrowers should strive to improve their FICO scores in the months, and even years, before applying for a mortgage.
How can you boost your credit? Start by pulling your credit report from the three major bureaus, Transunion, Experian, and Equifax. You're entitled to one free copy of your credit report from each bureau each year, and many credit-savvy borrowers stagger theirs so they can monitor their credit report for mistakes and signs of identity theft throughout the year.
Don't worry - checking your credit doesn't harm your score, but it can let you know if there are late payment alerts, collections, mistakes, or other red flags to address. Clean up collections items and late payment alerts by contacting the creditors and asking for a pay for delete or goodwill adjustment to remove them. Otherwise, you can build your credit by paying down revolving debts (like credit card debt), paying your bills on time, and minimizing any new credit applications.
2) Have a Steady Employment History
Mortgage lenders like to see that you have a steady income, because that makes you more likely to pay your mortgage payments on time. If you can show that you have at least two years of stable employment, you'll get a better rate. A steady wage or salaried position is preferred, but if you are self-employed or work as a contractor, you can still get a good interest rate if you can prove your income using tax records.
3) Scrape Together a Bigger Down Payment
Current mortgage rates in NJ and throughout the country are predicated on the level of risk attached to specific borrowers. The greater the risk that you won't repay the loan, the higher your interest rate. That's because lenders love to minimize risk as much as possible, so they can get their money back. One way you can show lenders that you're a low-risk borrower is by saving up a big down payment. Accumulating enough cash to make a big down payment shows lenders that you're financially responsible, and have enough extra income to save and create a financial cushion for yourself.
The 20 percent mortgage down payment is the industry gold standard because that's the down payment size that, along with other factors, presents the lowest risk profile, and gets borrowers the best interest rates. Of course, these days, most lenders are willing to give mortgages with smaller down payments, but the bigger your down payment, the lower your interest rate.
4) Consider a Shorter Loan Term
While a 30-year loan term will come with smaller monthly payments, a 15-year term will get you better interest rates, because shorter loan terms tend to come with less risk. If you can afford the higher monthly payment, you'll save money in interest in the long run - and you'll have your home paid off sooner.
5) Be Open to Non-Conventional Mortgage Types
There are many different kinds of loans available to borrowers today, many of which are available with little to no down payment. For example, if you're a veteran or active-duty military, you may qualify for a VA loan, guaranteed by the Department of Veterans Affairs. If you live in a rural area, you might qualify for a USDA loan, which is backed by the Department of Agriculture. If the home you want to buy is in fairly good condition, and especially if you have a smaller down payment, you might qualify for an FHA loan, backed by the Federal Housing Administration.
Because these types of non-conventional loans are backed by government agencies, lenders are willing to offer lower interest rates to borrowers who qualify for them. Depending on the type of loan you receive, however, you may need to pay for private mortgage insurance (PMI) for the life of the loan.
Mortgage interest rates may be on their way up again, but you can still get a great low rate on your mortgage for your next home. With the money you save, you can make home improvements, save for maintenance expenses, or just have fun.
