15 Tips for Finding the Best Mortgage Even Though Rates Are Up

You will probably need a mortgage if you are going to buy a home.

During the heart of the pandemic, it was easy to find an affordable loan because rates on a 30-year fixed-rate mortgage dropped below 3.00% -- a record low.

Now, though, rates are much higher and may continue to climb. You'll need to work harder and make smarter decisions to ensure your loan is still affordable. And these 15 tips will help you do just that.

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Before shopping for a mortgage, you should determine your credit score. If it is lower than around 740, you may want to work on trying to improve it to get a more affordable mortgage rate.

If you have a lower score but want to move forward anyway, it will affect the types of lenders you look for. You don't want to waste your time applying for a loan available only to borrowers with great credit.

ALSO READ: What Credit Score Do I Need for a Mortgage?

You should also calculate your debt-to-income ratio as it will impact the types of mortgages you can get and the rates lenders offer.

Your debt-to-income ratio -- the ratio of your debt relative to your income -- should include your proposed new housing costs.

Most lenders want your housing costs to be less than 28% of your income and your total debt costs to be less than 36%. If you are above this threshold, you may want to make some changes before applying for a loan, or you will need to find a lender that will allow you to move forward.

If you want the best mortgage, even with rates up, you should aim to save as much money for a down payment as possible.

The bigger your down payment, the more affordable your mortgage will be. You will have more options for lenders and be offered a better rate if you can put down at least 20%.

You will also avoid paying private mortgage insurance, which only protects lenders from loss in case of foreclosure. With a low down payment, you will have to pay for it even though it doesn't directly help you.

ALSO READ: Down Payments: What They Are, How They Work & How Much to Put Down

You'll also want a good idea of how much you will need to borrow. Some lenders do not offer loans above a certain threshold, called jumbo mortgages. By estimating your loan amount, you can narrow your focus to lenders that will actually issue you a mortgage for the amount you need.

Finding the best mortgage can be complicated because that means different things to different people.

Some people want to make lower monthly payments, even if that means the loan costs more over time. If that's the case, a loan with a longer payoff schedule, such as a traditional 30-year mortgage, would be best.

Others want to keep total borrowing costs down and don't mind paying more monthly. A loan with a shorter term, such as a 15-year mortgage, would fit the bill in those situations. Interest rates are usually lower on loans with shorter terms, and you won't pay interest for as long.

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There are different kinds of mortgages, including conventional loans and those with government guarantees, such as FHA loans.

When looking for the best mortgage, you should research the pros and cons of each option. If you're a well-qualified borrower, conventional loans are a better fit in most cases because they come with fewer up-front fees.

But a government-backed loan could be the right option if your financial credentials are iffy and traditional lenders would either deny you or charge you more for a loan.

ALSO READ: What Is an FHA Loan?

As mentioned, there's a big difference in terms of total costs and monthly payments between 15-year and 30-year loans. You also have other choices, like a 20-year mortgage. You should carefully consider which repayment timeline makes sense for you.

Remember, if you choose a loan with a shorter payoff, there is an opportunity cost because your monthly payments will be higher, and you'll be unable to do anything else with the money you are devoting to housing costs.

Most people focus on the interest rate, but fees should be taken into account as well. You may have to pay mortgage origination fees or, as mentioned, mortgage insurance with a small down payment. Look into these costs when comparing loan options so you can find the loan that's the most affordable when considering the big picture.

ALSO READ: Buying a Home? Prepare to Pay This Much in Closing Costs

Banks, credit unions, and online lenders all offer mortgage loans. Getting quotes from several different kinds of lenders will ensure you truly get the best rate offer for your situation.

When you shop around for a mortgage, you don't want lots of inquiries on your credit report. Too many inquiries can actually hurt your score. Look for lenders offering quotes that don't require a hard credit check, so you can get an idea of what you should pay without adversely affecting your ability to get a loan at a low rate.

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You will need a lot of financial paperwork to apply for a mortgage. That can include pay stubs, tax returns, and financial statements. It's best to get this ready so you can move forward more easily with finding out what your loan will cost.

ALSO READ: What Is a Mortgage Pre-Approval Letter?

When you find a lender you think is a good fit, you will need to go through the pre-approval process. That involves submitting all your financial details to get conditional approval.

You aren't necessarily guaranteed to get the loan you're pre-approved for. But the lender should move forward as long as your financial credentials are the same at the time of purchase and the house appraises for enough.

When you get a mortgage, you have the option to prepay interest. You do this by buying points, which reduce the rate you pay.

Points are a big up-front cost but can lower your monthly payments and total borrowing expenses over the life of the loan. If you plan to stay put in your house and not refinance for a long time, buying points may be worthwhile.

ALSO READ: Why It's a Better Time Than Ever to Buy Mortgage Points

As part of the pre-approval process, you'll be told what rate you will be offered when you move forward with getting a final loan.

You may have the option to pay a small fee to lock in that rate. If you do, you will be guaranteed that interest rate even if rates go up before you find and close on a home. Locking in your rate may be a smart move if you think rates will go up.

Finally, you should be aware that trying to find the best mortgage is hard when rates are up -- especially if you need to take time to raise your credit score or shop around for multiple lenders. Start looking into loans early, so you aren't rushing after you find the perfect house to buy.

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The good news is that it's still possible for most people to get an affordable mortgage (especially relative to historical rates).

You will need to make sure your financial credentials are in order and that you shop around -- but now you know how to do that. Get started with the process today to make your dreams of becoming a homeowner a reality.

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