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? When buying a home, you must know how much you can afford. Understanding all the details of your mortgage and knowing money-savvy tips to help you save is important too! 

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 2023, 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. Mortgage rates are rising, but you can get a lower rate. Mortgage interest rates have been on the rise throughout the year. This is not good news for home buyers, but it doesn’t have to be that high. There are ways of fighting the increasing rates and getting a great deal on your mortgage loan. Mortgage interest rates have been rising throughout 2022. That’s bad news for home buyers, but it doesn’t have to be the end of the line. There’s a lot you can do to fight rising interest rates and get a better deal on your mortgage loan. If you have the cash, you can also make additional payments on your mortgage, whatever its term. By taking extra bites out of what you owe, you’ll ultimately pay off the loan sooner. (Just make sure your loan has no prepayment penalty. Most don’t.)

Finally, remember that you’re never really locked into an interest rate. When rates fall, do the math. Maybe your dream home will have come within reach, or perhaps it’ll make sense to refinance your current home at a lower rate, or for a shorter term. And with inflation numbers continuing to remain high, it's unclear when mortgage rates will stop their climb. If you're concerned about mortgage interest rates rising and how it might affect your ability to buy a home or afford your monthly payment, here are some steps you can take to make it work for you.

Pay your bills on time

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. Qualifying for the lowest rate boils down to having clean credit. A better score can help you get more credit at attractive interest rates, which can save you thousands over time. 

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. Paying your bills on time is an important aspect of taking control of your financial life. Knowing when your bills are due and making a habit of paying them by the deadline can reduce your stress, save you money, boost your credit score, and enable you to get lower-interest credit in the future.

Boost your down payment

Making a larger down payment is good because the lender can see you as less risky, which can allow them to offer you a lower rate. When you put down a large down payment, it means you are going to pay less on your monthly payments. A larger down payment means you are a less risky borrower, which could mean a lower interest rate. If you provide a larger down payment, lenders will view you as less of 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. When you make a down payment of at least 20%, you are going to avoid things like private mortgage insurance when applying for a conventional loan. You can easily save about three to four hundred dollars in appraisal costs because some lenders are going to offer an appraisal waiver when the down payment is at least 10%.

Pros of putting a large down payment on a house

• A smaller monthly payment: A larger down payment means a smaller loan and lower monthly payments.

• No PMI: Borrowers must pay PMI if they make less than a 20% down payment. Borrowers pay mortgage insurance premiums with FHA-backed loans.

• A better mortgage interest rate: Putting more money down may give you a better interest rate on the loan.

• Lower closing costs: Certain closing costs are linked to the amount of the loan. Smaller loans typically have lower closing costs.

• Starting out with more equity: Home equity can be a long-term strategy for building wealth.

• Paying off the mortgage sooner: Putting down more money can help you to pay off the mortgage loan sooner.

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.

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.

Working With a Mortgage Broker

A mortgage broker can place borrowers into the best program that fits an individual’s financing needs. When you directly work with a mortgage instead of the lender or bank, you are more likely to get a loan with a favorable rate. The broker is going to look at your individual financing needs and help you find the right loan for you.  Let’s say you are looking for a 30-year fixed rate with no points, instead of going to a lender and accepting the options they are offering, you can have someone help you find a lender offering a good deal. A mortgage broker is going to do that for you. Mortgage brokers can help you with great deals because they get their loans at wholesale pricing and those savings are passed to borrowers. 

Should You Get Worried About the Rising Rates?

When a loan has a higher rate, it means you must pay more in monthly payments, and you are going to pay a lot in interest over the life of the loan. This doesn’t mean you have to start panicking or making rash decisions. Buying a home is one of the biggest decisions. The best thing to keep in mind is you shouldn’t try to time the market or interest rates. Doing this can lead to regret. When you feel like it is time for you to buy a home, just do it. You shouldn’t let peer pressure and headlines influence this. The best way to know if you are ready to buy a home is if you can afford it, no matter the house price or interest rate. Don’t make things complicated for yourself by focusing too much on house prices and interest rates. The process of buying a home is not that complicated, provided you feel like it is the right step for you. The interest rates are going up and this is going to happen for the rest of the year. If you are thinking about buying a house, then make sure you see your financial situation and whether it makes sense for you to do it. Do it now if possible so you don’t end up regretting it later. You shouldn’t only look at interest rates when deciding whether to buy a house or not.

Make lenders compete for your business

It is a good idea to shop around and see loan products from different lenders because you will end up with a great deal. The rates going up have meant fewer people are buying and refinancing their homes. This has made lenders eager for business and can end up competing for yours.

“Since rates have risen, the number of people buying and refinancing has dropped sharply. So, lenders are eager for business and more likely to compete for your loan.” Keep in mind that since rates have risen, the number of people buying and refinancing has dropped sharply. So, lenders are eager for business and more likely to compete for your loan. Use this to your advantage by negotiating for a lower interest rate and/or lower closing costs.

STEPS TO TAKE: 

Rising interest rates aren’t good news for home buyers. But unfortunately, today’s higher rates likely aren’t going anywhere. So rather than giving up, borrowers need to adapt their strategies to the new interest rate market. Luckily, there’s plenty you can do to fight the market and lower your rate. Keep your finances in order, know your loan options, and don’t be afraid to compare lenders and make them compete for your business.

Lowering your rate by even just a fraction of a percent can lead to huge savings. So, any additional work you put in to find a lower rate should be well worth the effort.