Introduction
Getting a low interest rate can be a total game changer for your future, saving you tens of thousands of dollars over the life of the loan. As 2024 rolls around, the mortgage landscape is influenced by economic factors, lender policies and your personal financial health. To help you navigate this crazy world, this guide will give you all the strategies you need to qualify for a low interest mortgage rate. Your Interest Rate Matters
Your interest rate isn’t just a number; it’s a big deal. Here’s why it’s important:
- Monthly Payment: A tiny difference in the interest rate can change your monthly payment by hundreds of dollars. For example, on a $300,000 loan, a 0.5% lower rate would save you about $80 a month. Over 30 years that’s nearly $30,000.
- Total Interest Over the Life of the Loan: The interest rate determines how much you’ll pay over the loan term. Lower rate means you’ll pay less interest and build equity faster.
- Home Buying Power: The interest rate affects how much house you can afford. Lower rates mean you can qualify for a bigger loan without increasing your monthly payments and get access to more homes.
Knowing your interest rate is key to taking control of your future and getting the lowest rate possible. Steps to Qualify for a Low Interest Rate
High Credit Score
Your credit score is one of the first things lenders look at when determining your interest rate. The higher your score, the more likely you’ll qualify for a lower rate and save thousands of dollars over the life of the loan.
Here’s how to improve and maintain a high credit score:
- Timely Payments: Payment history is 35% of your credit score. Always pay your bills on time. Late payments can have a big impact even by a few days.
- Reduce Credit Card Balances: High credit utilization (the ratio of your credit card balances to your credit limits) can lower your score. Keep your balances below 30% of your total credit limit.
- Limit New Credit Applications: Each time you apply for new credit it results in a hard inquiry which can lower your score slightly. If you’re planning to apply for a mortgage, avoid applying for other new credit accounts in the months following your application.
- Check Your Credit Report Regularly: Errors on your credit report can drag down your score. Get your free annual credit report from the three major bureaus (Equifax, Experian and Trans Union) and dispute any errors you find.
For example, if your score is 660 and you want to buy a home. By paying down your credit card balances and making on time payments you could raise your score to 720 and get a 0.5% lower rate and save thousands of dollars over the life of the loan.
If your credit score is 720 you could qualify for a 3.5% mortgage rate, 660 might get you a 4% rate. On a $300,000 loan that’s a difference of about $100 a month, which is $36,000 over 30 years.
Mortgage and Refinance Rates in 2024
Lower Your Debt-to-Income Ratio (DTI)
Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes towards paying debts. Lenders like to see a DTI of 43% or lower. A lower DTI means you have more income left over to cover your mortgage payments which can get you a lower interest rate. Here’s how to lower your DTI:
- Pay Off High-Interest Debt: Focus on paying down credit cards, personal loans or other high interest debt. This lowers your DTI and improves your credit score.
- Increase Your Income: Consider ways to increase your income such as taking on a part-time job, freelancing or renting out a room in your home. Higher income means lower DTI.
- Avoid New Debt: Postpone big purchases that require financing until you get your mortgage.
Example: If your monthly income is $5,000 and your debt payments are $2,200, your DTI is 44%. By paying off a $200 monthly car loan your DTI drops to 40% making you more attractive to lenders and potentially lower your mortgage rate.
Save for a Bigger Down Payment
A bigger down payment reduces the amount you need to borrow which can get you a lower interest rate. And if you can put down 20% you’ll avoid paying private mortgage insurance (PMI) which can save you even more on your monthly payment. PMI is insurance that protects the lender if you stop making payments on your loan. It’s usually required if you put down less than 20% of the home’s purchase price. Here’s how to save for a bigger down payment:
- Automate Your Savings: Set up a dedicated savings account for your down payment and automate monthly transfers into this account. Treat it as a non-negotiable expense.
- Reduce Unnecessary Spending: Review your budget and see where you can cut back such as dining out, subscriptions or entertainment.
- Consider Down Payment Assistance Programs: Some state and local programs offer grants or low interest loans to help with down payments especially for first time home buyers.
Example: If you’re buying a $350,000 home and can put down 20% ($70,000) you’ll reduce your loan amount and avoid PMI and potentially save $100-$200 a month.
Consider Buying Points
Discount points are upfront payments made at closing to lower your mortgage interest rate. One point costs 1% of the loan amount and reduces your rate by about 0.25%. Here’s how to decide if buying points makes sense for you:
- Calculate the Break-Even Point: How long will it take the monthly savings to pay back the cost of the points? Buying points can be a good financial move if you plan to stay in the home past the break-even point.
- Consider Your Cash Flow: Do you have enough cash to cover the points and closing costs without putting your financial stability at risk.
Example: On a $300,000 loan, 2 points would cost $6,000. If this drops your rate from 3.75% to 3.25%, your payment would go down by about $84. It would take about 6 years to recoup the cost, so it’s a good option if you plan to be in the home for at least that long.
Interest Rate Buy down
An interest rate buy down is when you pay a lump sum at closing to lower your mortgage interest rate temporarily or permanently. Home builders or sellers use this in competitive markets to make a property more attractive. There are two types of buy downs:
- Temporary Buy down: The rate is lowered for a set period, usually the first few years of the loan. For example, a 2-1 buy down lowers the rate by 2% in the first year and 1% in the second year before it goes back to the original rate. This makes your first few payments more affordable as you settle into your new home.
- Permanent Buy down: The rate is lowered for the life of the loan but requires a larger upfront payment.
Example: If you’re buying a new home, the builder might offer to pay for a 2-1 buy down, lowering your rate from 5% to 3% in the first year and 4% in the second year before it stabilizes at 5%. This could save you several hundred dollars a month in the first few years and help you manage your cash flow.
How to Refinance Your Mortgage: A Step-by-Step Guide
Consider an Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) has a lower fixed rate for a set period, usually 5, 7 or 10 years, then adjusts annually based on market conditions. ARMs can be a good option if you plan to sell or refinance before the rate adjusts. Here’s when an ARM might work for you:
- Short-Term Ownership: If you plan to move in a few years, the ARM’s lower initial rate can save you money without the risk of rate increases.
- Expecting Income Growth: If you expect a big income increase you might be able to handle the rate increase when the ARM adjusts.
Example: A 5/1 ARM might start at 3% for the first 5 years compared to a 30-year fixed rate of 3.75%. If you sell or refinance before the 5 year period ends you can benefit from the lower initial payments without having to deal with rate adjustments.
Choose a Shorter Term
Shorter terms like a 15 year loan have lower interest rates than a 30 year loan. While the monthly payments are higher, the total interest paid over the life of the loan is much lower. Here’s why you might choose a shorter term:
- Interest Savings: The lower interest rate and shorter term can save you tens of thousands of dollars in interest.
- Faster Equity Building: With a 15 year loan you’ll build equity in your home much faster.
Example: On a $300,000 loan, a 30 year mortgage at 3.75% would be around $200,000 in interest. A 15 year mortgage at 3% would be around $72,000 in interest, saving you $128,000 over the life of the loan.
Assumable Mortgages
An assumable mortgage allows you to take over the seller’s existing loan, including their interest rate. This can be good if interest rates have gone up since the seller got their mortgage. Here’s what to consider:
- Eligible Loans: FHA and VA loans are assumable but you’ll need to meet the lender’s credit and income requirements to assume the mortgage.
- Negotiation: You may need to negotiate with the seller to cover any difference between the sale price of the home and the outstanding loan balance.
Example: The seller has an FHA loan with a 3% interest rate and current rates are 4.5%. By assuming the seller’s mortgage you could save hundreds of dollars a month in interest.
Shop Around for the Best Rates
Mortgage rates can vary greatly between lenders so shopping and comparing is key. Here’s how to make sure you get the best deal:
- Compare Interest Rates and APRs: Look at the interest rate and the annual percentage rate (APR) including lender fees and other costs.
- Consider Loan Terms: Decide if a fixed or adjustable rate mortgage is best for you and compare loan terms, 15, 20 or 30 years.
- Negotiate: Feel free to negotiate with lenders. If you have a good financial profile you may be able to get a better rate or lower fees.
Example: You get two offers for a $300,000 mortgage. Lender A offers 3.5% interest with $5,000 in closing costs and Lender B offers 3.75% with $3,000 in closing costs. Over 30 years the difference in interest could be huge so you need to weigh the rate and fees.
Get Your Finances in Order
Being financially prepared will help you qualify for a low interest rate. Here’s what to do:
- Collect Your Documents: Lenders will need detailed documentation including proof of income, tax returns, bank statements and a list of debts and assets. Having these ready will speed up the process.
- Get Pre-Approved: A pre-approval letter from a lender will show sellers you’re serious and give you a clear idea of how much you can borrow. It will also make you a stronger buyer in competitive markets.
- Don’t Make Big Changes: Don’t change jobs, buy big ticket items or open new credit accounts before closing on your mortgage as these will impact your loan approval.
Example: Let’s say you plan to buy a home in the next 6 months. By collecting your documents and getting pre-approved now you can move fast when you find the right property and potentially get a better interest rate.
Use Government Programs
Government programs will help you get a low interest rate, especially if you’re a first-time homebuyer or meet specific criteria. Here’s what to look into:
- First-Time Homebuyer Programs: Many states offer programs that provide down payment assistance and lower interest rates for first-time buyers. These programs often have income limits or other requirements.
- FHA Loans: The Federal Housing Administration offers loans with lower interest rates, lower down payments and more flexible credit requirements making homeownership more accessible.
- VA Loans: For veterans and active-duty service members, VA loans offer competitive interest rates, no down payment and no PMI. They’re one of the best mortgage options out there.
- USDA Loans: For rural buyers, USDA loans offer low interest rates and no down payment but eligibility is based on income and location.
Example: If you’re a first-time buyer with limited savings, exploring FHA loans or state-specific first-time homebuyer programs will help you get a lower interest rate and lower upfront costs.
How to Get the Best Mortgage Rate: 20 Tips and Tricks
Know the Economic Factors
Economic conditions play a big role in determining mortgage rates. By staying informed you can time your mortgage application better and get a lower rate:
- Federal Reserve Decisions: The Federal Reserve’s interest rate decisions directly impact mortgage rates. For example if the Fed raises rates to curb inflation, mortgage rates will also go up.
- Inflation: Higher inflation means higher mortgage rates as lenders want to maintain their profit margins. Lower inflation means lower rates.
- Housing Market Trends: In a buyer’s market where there are more homes for sale than buyers, you may have more negotiating power to get better terms including a lower interest rate.
Example: If rates are expected to go up lock in before they rise. If the Fed says rates are unlikely to rise wait for rates to fall.
Use a Mortgage Broker
A mortgage broker can help you navigate the mortgage market by comparing loans from multiple lenders. Brokers have access to deals the general public can’t get and can find you the best rate. Here’s what to consider:
- Research Brokers: Look for brokers with good reputations, good reviews and a large lender panel.
- Know Broker Fees: Brokers charge a fee for their services which can be a flat fee or a percentage of the loan amount. Make sure you know how they’re compensated before you commit.
- Ask About Lender Panel: The quality of a broker’s lender panel can determine the competitiveness of the rates they can offer you. Ask about the number of lenders they work with and if they have access to exclusive rates.
Example: A broker might get you 3.5% from a lender you hadn’t considered while the best rate you found yourself was 3.75%. Over 30 years that 0.25% difference could save you thousands.
Conclusion
To get a low interest mortgage in 2024 you need to plan, be disciplined and understand the mortgage landscape. You can increase your chances of getting the best deal by having a high credit score, reducing your debt to income ratio, saving for a bigger deposit, exploring mortgage options like discount points, adjustable rate mortgages and assumable loans. Stay informed about the economy, use government programs and work with a mortgage broker to improve your chances of success. By following these tips you can make informed decisions, achieve your home ownership goals and minimise your mortgage costs and be financially stable long term.
Mortgage Rates Forecast For 2024
