Strategies to Qualify for a Low-Interest Mortgage

Higher mortgage interest rates lead to higher monthly payments. It can make a big difference to your short- and long-term financial health.

For example, according to Navy Federal Credit Union, dropping your rate by half a percent can save you thousands of dollars. On a $300,00 home, dropping the interest rate from 7.0 percent to 6.5 percent with a 20 percent down payment saves you roughly $80 per month. But more important, for the long term, it saves you more than $28,000 over a 30-year loan.

According to Zions Bank, a 100-point difference in your FICO score could change your monthly payment by hundreds of dollars. It could affect your overall interest payments by tens of thousands of dollars.

According to the Consumer Financial Protection Bureau (CFPB), credit checks from lenders are reported to credit reporting companies as an “inquiry.” They typically have a small negative effect on your credit score and can be seen by other lenders when they check your credit.

Shopping around for a mortgage doesn’t hurt your credit. That’s because, according to the CFPB, within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit report as one inquiry. After all, you are only going to buy one house.

Even if you’re outside the 45-day window, the effect of an additional inquiry is small.

Keep in mind, regardless of the timing, that shopping around for the best deal can save you a lot of money in the long run.

Although shorter terms typically save you money overall, they have higher monthly payments.

According to the CFPB, with a shorter term, you will be borrowing money and paying interest for a shorter amount of time. This ultimately saves you money.

One of the biggest advantages of considering a shorter term is that the interest rate is usually lower. In fact, it can be as much as a full percentage point lower than a standard rate.

However, much depends on specifics. You’ll want to look at interest rates, but you’ll also want to take into account how much higher your monthly payment will be. Rates vary among lenders, so you should research current 15-year and 30-year average mortgage rates.

To determine your DTI, add up your monthly debts and divide that number by your pretax monthly income. Your DTI is the final number, expressed as a percentage.

Typically, the higher your DTI is, the higher interest rate you’ll have to pay. If it’s too high, you may not even qualify for a mortgage.

According to Wells Fargo, a DTI ratio of 35 percent or less is considered good and means your debt is at a manageable level. Lenders generally view a lower DTI ratio as favorable.

Thirty-six percent to 49 percent means you’re managing your debt adequately but need to improve. If you have 50 percent or more, you’ll need to pay down debt. With this DTI ratio you may be limited as to how much you can borrow and you may have a higher interest rate.

According to Equifax, lenders use this to determine how well you manage your current debt. And, typically, lenders want to see that you use no more than 30 percent of the total revolving debt.