Shopping for a mortgage? Good news: 2015 offers low interest rates. Better news: here are some tips you can use to make the painful process easier.
- Avoid Excessive Debt and Poor Credit – This has always been sound advice and will still be sound advice far in the future when topical discussions include lunar interest rates and the collapse of the Martian housing market.
Maintaining good credit and minimizing your debt are always primary factors in your ability to qualify for a good mortgage. When credit is tight, those factors may make the difference in qualifying for a mortgage at all; in better times, they will dictate your ability to get a favorable interest rate.
Know your credit score and your DTI (debt-to-income) ratio and compare them to current standards well before you start shopping. Currently, credit scores in the high 600’s and above are preferred, along with DTI ratios of less than 43%. If your values don’t stack up, put a plan in place to cut your debt and improve your credit score for a future home purchase.
- Don’t Delay your Fixed-Rate Loan – Interest rates are still almost absurdly low in historical context – hovering near 4% for a 30-year fixed rate loan as of this writing – and they are almost certain to rise later in 2015 as the Fed initiates a long-expected rise in interest rates. Early 2015 may represent the best chance for low fixed rates, whether you are buying a new home or refinancing your old one.
However, do not rush into a home purchase that you are not prepared for just because interest rates are low. If you do not have sufficient down payment money or income, do not risk default with a riskier loan option. Consider buying a smaller house, or waiting until you are in better fiscal shape.
- Seek Pre-Approval – Using the pre-approval process with a lender will help you gauge the proper size of house that you can afford and spot any potential problems to correct.
Do not confuse pre-approval with pre-qualification. Pre-qualification is an informal workup based on information you supply; pre-approval is a more thorough process based on your credit report and other information collected by the lender.
- Shop Around for Mortgages – Do not just automatically select a lender without comparing rates and terms. Shopping around for almost any purchase is prudent, and for something as important and potentially money saving as your loan terms, it is inexcusable not to check out your options.
However, it is important that you understand the mortgage process so you are able to compare terms and fee/payment structures between different types of loans. Otherwise, you may make the wrong choice. Educate yourself using resources from impartial sources, such as the Consumer Financial Protection Bureau (CFPB).
- Make an Extra Payment Toward Principal – A simple extra payment toward the principal on your mortgage can save incredible amounts of money in the long run, especially if you are in the early stages of your loan where you can get the most benefit from compound interest. However, you must make sure there are no early payment penalties within your loan terms (or if there are, that the long-term payment savings outweighs the short-term penalty).
Armed with these tips, you should be able to make the most of your home buying experience in 2015. We wish you good luck and favorable loan terms.