How to Afford a Home with Today’s Soaring Home Loan Rates
On June 16, Freddie Mac announced that the 30-year fixed-rate mortgage soared to 5.78 percent, an increase from the previous week’s 5.23 percent. According to the Washington Post, it was the highest rate in the last 14 years. On June 20, Bankrate announced that the 30-year fixed-rate mortgage increased further to 5.99 percent with an APR of six percent.
If you are looking to buy a home now, finding the best mortgage company that can give you the lowest rate based on your income and credit score is crucial. Depending on your cash, you may also have to find a lender with the lowest required down payment. Following are some steps you can take to increase your chances of getting a mortgage at the lowest rate possible
Increase Your Credit Score
You need a credit score of 620 or higher to increase your chances of getting approval with a reasonable mortgage rate. You can check your current credit score at AnnualCreditReport.com. Usually, you can only get a free report once a year. Up to the end of 2022, however, you can get it once a week for free.
If your current credit score is lower than 620, you can take the following steps to increase it:
- Check your credit report for errors and dispute them
- Pay all your bills on time
- Reduce your credit card balances
- Avoid opening new lines of credit
Get Help From a Mortgage Lender
There are several things mortgage lenders look at when considering you for a loan. In addition to your credit score, they will also consider:
- Your employment history
- Your current income
- Your debt-to-income ratio
You can get prequalified for a mortgage loan by submitting information about your income, debts, and assets to a lender. This will give you an idea of how much you can afford to borrow and what interest rate you can expect to pay. Comparing rates from multiple lenders is essential to ensure you’re getting the best deal possible.
You May Need a Higher Down Payment
The higher your credit score, the lower your interest rate will be. However, you may still need to come up with a down payment of 20 percent or more to qualify for the best mortgage rates. If you don’t have that much cash on hand, you may still be able to get a loan with a smaller down payment. The trade-off is that you’ll likely pay a higher interest rate.
You can check with your state housing finance agency to see if they offer programs that can help you with a down payment. You may also be able to get help from family or friends.
Save Up for Mortgage Insurance
If you cannot make a 20 percent down payment, you’ll likely have to pay for mortgage insurance. This protects the lender in case you default on your loan.
Mortgage insurance can add to your monthly payment. So, it’s essential to factor that in when considering how much house you can afford.
You May Qualify for a Government-Backed Loan
You may be eligible for a Veterans Affairs (VA) loan if you’re an active-duty service member or a veteran. These loans are backed by the government and don’t require a down payment. You’ll still need to pay for mortgage insurance if you cannot make a 20 percent down payment. Still, you may be able to get a lower rate than with a conventional loan.
The Federal Housing Administration(FHA) also offers loans that are backed by the government. These loans may be a good option if you cannot make a sizable down payment.
Consider an Adjustable-Rate Mortgage
If you don’t plan on staying in your home for more than five years, you may want to consider an adjustable-rate mortgage (ARM). These loans typically have lower interest rates than fixed-rate mortgages. However, the interest rate can increase after five years or so. This could cause your monthly payments to increase.
If you’re considering an ARM, ensure you understand how the interest rate will be calculated and what the caps are. That way, you’ll know how high your payments could potentially go.
You May Need a Co-Signer
If you’re having trouble qualifying for a loan on your own, you may be able to get approved by adding a co-signer to your loan. This person will be responsible for making the payments if you cannot do so.
Keep in mind that this can put a strain on your relationship with the co-signer. So, make sure you’re both comfortable with the arrangement before moving forward.
Explore All Options
You can do several things to increase your chances of getting a mortgage loan at a reasonable interest rate. Check your credit report for errors and dispute them, pay all your bills on time, reduce your credit card balances, and avoid opening new lines of credit.
You may also want to get help from a mortgage lender to see what options are available to you. If you don’t have the cash on hand for a 20 percent down payment, you may still be able to get a loan with a smaller down payment but at a higher interest rate.
Save up for mortgage insurance if you’re unable to make a 20 percent down payment. And lastly, consider an adjustable-rate mortgage if you don’t plan on staying in your home for more than five years. Keep in mind that there are several options available to you, so explore all of your options before deciding which one is best for you.