An increase in interest rate leads to:
- Increased monthly mortgage payment
- Increased debt-to-income ratio
- Potential reduction in the loan amount you originally qualified for, or even disqualification from receiving a loan
The factors that determine your interest rate are many:
If you plan to stay in your home for less than five years, an adjustable-rate mortgage is a safe option. A lower initial interest rate means your monthly payments will stay low. If you plan to stay in your home for more than five years, a fixed-rate mortgage could be the best loan type. It locks in a rate for the full length of the loan so future rate increases won’t affect payment amounts.
Get ahead of the increase
To prepare for a rate increase, our strongest recommendation is that you save! A larger down payment will help lower your interest rate and could drastically change your monthly payment. Loans to borrowers making higher down payments (10-20% of purchase price) are viewed as less risky, and receive lower rates. You can cut out unnecessary expenses, like buying lunch every day, and put those savings towards a down payment. A 20% down payment eliminates the need for mortgage insurance.
Improve your credit score
Your credit score has a big impact on your interest rate. On a conventional mortgage loan, the difference between the rate offered to a borrower with a credit score of 600 versus 750 can be as much as a percentage point. To improve your credit score:
- Pay bills on time
- Pay down credit cards
- Open new credit cards only as needed
- Use 30% or less of your available credit
- Don’t close accounts
Prioritize what you want versus what you need in a home
Certain features and amenities of a home are associated with higher costs. Some luxuries might not make sense financially.
At First Option, a licensed loan officer will be able to pre-approve your home loan and identify the best loan program and type for you. Getting pre-approved by a First Option Mortgage loan officer ensures you know exactly where you stand financially when buying a home.
Get the full interest rates infographic here: