Mortgage rates are showing no signs of falling, with Freddie Mac's Primary Mortgage Market Survey showing that the average rate on a 30-year, fixed-rate mortgage stood at 4.85 percent as of the week ending Oct. 18. That's up from 3.88 percent a year ago.
And these rates are only expected to go up in 2019. Freddie Mac predicts that the average rate on a 30-year, fixed-rate mortgage will hit 5.1 percent next year.
If you're planning to buy a home and take out a mortgage to finance it, what can you do to boost your odds of qualifying for the lowest interest rate possible?
It all comes down to your credit score, how much debt you have and how much of a down payment you can afford. These are the factors that lenders look at when determining how likely you are to make your mortgage payments on time. They're also the factors that directly impact the interest rate your lender assigns to you.
If you want to beat the interest rate hikes that might be coming in 2019, you'll need to turn yourself into the type of borrower that presents the least amount of risk. Those are the borrowers that lenders reward with the lowest mortgage interest rates.
Pay your bills on time
Trent Reed, senior vice president and regional manager with the Wilmington, North Carolina, office of Angel Oak Home Loans, said that nothing plays more of a role in your interest rate than your three-digit FICO credit score.
Mortgage lenders look at this score to determine how likely you are to default on your loan payments. A high score shows lenders that you have a history of managing your credit and paying your bills on time. This makes you less of a risk and makes it more likely that they’ll reward you with a lower mortgage interest rate.
Average FICO scores have been rising over time. Today, lenders consider scores above 740 to be particularly strong, so aim for that figure if you want to qualify for the lowest interest rates.
The best way to boost your credit score? Pay your bills on time. Not all of your payments are reported to the national credit bureaus of Experian, Equifax and TransUnion. But your credit card, auto loan, student loan and mortgage loan payments are. If you make these payments on time each month, your score will increase and the interest rates you’ll receive will fall.
Slash your credit card debt
Paying your bills will help your score, but so will reducing your credit card debt. If you are using too much of your available credit, your FICO score will take a hit. That could leave you with a higher interest rate on your mortgage.
Drew Carls, loan officer with the Austin, Texas, office of Legacy Mutual Mortgage, said that consumers should keep their credit card debt to 30 percent or less of their credit limits.
Carls recommends that before searching for homes consumers order a copy of each of their credit reports maintained by Experian, Equifax and TransUnion. You can order one free copy of each of these reports every year at AnnualCreditReport.com. These reports will list your open accounts and the money you owe on them. They will also list any missed or late payments you've made during the last seven years.
"We can make sure that borrowers aren't missing any opportunities to increase their credit scores while house hunting," Carls said.
Boost your down payment
Daniela Andreevska, marketing director at San Francisco-based Mashvisor, which helps people find investment properties, pointed to increasing your down payment as a way to lower your interest rate.
It's true that you can find mortgage loans that come with down payments as low as 3 percent of your home's purchase price. If your FICO credit score is at least 580, you can also qualify for an FHA mortgage with a down payment of just 3.5 percent of your home's purchase price.
But if you provide a larger down payment, lenders will view you as less a risk. They'll consider you less likely to stop making your mortgage payments if you've already invested a significant amount in your home.
"The higher your down payment, the lower the interest rate," Andreevska said. "Try to pay close to 20 percent. In this way, you will be able to decrease your interest rate."
Reduce your monthly debt
Lenders also look at something called your debt-to-income ratio when determining your interest rate. This ratio measures how much of your gross monthly income your monthly debts consume. The higher this rate, the riskier you appear to lenders. In their view, the more burdened you are with loads of monthly debt, the more likely you are to miss your mortgage payments.
David Reischer, an attorney and chief executive officer of New York City-based LegalAdvice.com, said that the monthly debts of homeowners should equal less than 50 percent of their gross monthly income.
Apply for a shorter-term mortgage
The shorter the term of a mortgage, the lower the interest rate. Again, this comes down to risk. Lenders consider shorter-term mortgages to be less risky than longer-term ones. That’s why the Freddie Mac Primary Mortgage Market Survey listed the average interest rate of a 15-year, fixed-rate mortgage as 4.26 percent for the week ending Oct. 18 while that rate stood at 4.85 percent for 30-year versions.
Shorter-term mortgages do come with higher payments because you’re repaying over a shorter period. But you will save tens of thousands of dollars in interest if you take the full term to repay a shorter-term loan. If you can afford the higher monthly payment, and you should craft a household budget to be certain of this, consider the shorter-term loan if you want the lowest possible interest rate.