4 Best Ways to Score an Affordable Mortgage Even When Rates Are Higher
- A mortgage will cost you much more this year than it did last year.
- Rates have climbed above 5% for a 30-year fixed rate loan while they were below 3% during much of the pandemic.
- There are still ways to ensure borrowing is affordable, by working on your credit score, saving a bigger down payment, and shopping around for lenders.
Don't get a mortgage without reading this.
Mortgage rates are considerably higher than they were during the heart of the pandemic, with the average interest rate on a 30-year mortgage now far exceeding 5%. As rates have crept up, many would-be home buyers have become discouraged by the fact that borrowing to buy a home has become so much more expensive.
The good news is, though, while a mortgage is going to come with a higher interest rate now than it did a short time ago, that doesn't mean you should give up on your homeownership dreams. Mortgages still remain pretty inexpensive compared to historical levels when looking at the long-term rather than just the last few years -- and there are ways to get an affordable loan if you follow a few key tips.
Here's how you can make sure your mortgage costs are within your budget even with today's high rates.
1. Improve your credit score
One of the best ways to get a mortgage that you can afford is to improve your credentials as a borrower. Your credit score can make a huge impact on how much your loan will cost, so you should do everything you can to increase it.
This can include being aggressive about paying off debt to improve your credit utilization ratio, asking creditors to remove black marks from your credit history (which they may be willing to do voluntarily if you're mostly a good customer), and correcting any errors on your credit report that could be dragging your score down.
Improving your credit is one of the single best ways to maximize the chances your loan will be affordable, since credit makes a huge impact on your mortgage rate.
2. Save up a larger down payment
Saving up a hefty down payment can also go a long way towards helping you to ensure your mortgage loan doesn't come with too high of a monthly payment.
A bigger down payment helps you to reduce mortgage costs in a few different ways. Obviously, when you put more money down, you do not have to borrow as much and you will therefore be able to keep your costs lower, as your principal balance is lower.
A larger down payment also reduces the risk of the loan for lenders, so they will typically offer you a lower interest rate than if you put down less. And if you can increase your down payment enough to ensure that it equals or exceeds 20% of the value of the home you are buying, you can avoid having to pay private mortgage insurance. This will offer considerable savings, since PMI can be an expensive added monthly cost that typically adds up to around 1.00% to 1.50% of your loan's balance.
3. Choose your mortgage loan carefully
You'll also want to make sure you get the right kind of loan and from the right lender. Different mortgage providers charge different rates so shopping around and getting quotes from many banks, credit unions, and online lenders can help you get the best possible deal.
Certain types of mortgages can also be more costly. For example, a government-backed loan from the FHA may come with more upfront fees than a conventional loan, so you may want to steer clear of this type of mortgage if you are a well-qualified borrower who can get approved for a competitive loan that doesn't come with a government guarantee.
4. Buy a less-expensive house
Finally, if you can reduce the cost of the house you buy, you can also keep mortgage costs down. Again, the amount you borrow will be lower so it will be easier to ensure your monthly payments are within budget. And you may be able to get a more competitive rate on a smaller loan that presents less risk to the lender -- especially if you're buying far less house than you can afford.
By taking these four steps, you'll have a greater chance of getting the right mortgage for you so you can still buy a home, even at a time when the mortgage market isn't as favorable as it could be.
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