I am looking into buying my first home and I'm wondering what the best way to get better interest rates is.
I am interested in buying my first home within the next year. I'm wondering which will have the better effect on obtaining a better interest rate: a bigger down-payment or paying off more or all of my credit card debt. For example, which would afford a lower interest rate (given everything else the same): a 3% down payment with $5,000 in credit card debt or a 10% down payment with no credit card debt.
You are looking for a simple answer, but your question contains many variables so my answer will be a complex. First, let us look at a constant in the equation: 35%. That is the ratio that banks look for as the maximum percentage of debt a household should have as a percentage of income.
Let us compare you, with zero debt, and a neighbor. Let us say your neighbor earns $500 more per month than you do, but also pays $500 each month in credit card debt. Assuming equal down-payments, the bank will see you as a more attractive risk than your neighbor. You can handle a larger mortgage than your neighbor because your debt ratio is lower. You merit a more attractive rate because you present a better risk than your neighbor, all other things being equal.
Now let us add the down-payment variable. A 20% down payment reduces your principal as compared to a no-down or 3% down payment. It also buys you a lower interest rate, makes it easier to qualify for a loan, and removes the requirement to buy private mortgage insurance. Weigh the benefits of waiting to buy a house with a 20% down payment verses buying sooner with a smaller down payment.
Regarding your question, the difference between 3% down and $5,000 existing debt verses 10% down and no debt is huge. Again, the rule of thumb is that your debt load should be no greater than 35% of your monthly household income. For the sake of argument, let us say for the sake of argument that your household income is $4,000 per month. That means that you can afford a $1,400 debt load. If you pay $300 each month to pay down the existing debt, that means the bank will figure you can afford a $1,100 mortgage payment. On the other hand, if you have zero credit card debt, the bank will figure you can afford a $1,400 monthly payment.
What is the difference between a $1,100 per month house and a $1,400 per month house? Assuming a 5.5% interest on 30-year loans and $2,000 in annual property taxes, a $1,100 payment buys a $165,000 mortgage, and $1,400 payment buys a $230,000 mortgage. Granted, the more expensive house will have higher property taxes, so this illustration is somewhat exaggerated. I am trying to make the point that driving down your other debts frees you for a larger mortgage and a pricier house in a nicer neighborhood.
To learn more about mortgages, read the Bills.com article about mortgage basics information.
I hope this information helps you Find. Learn & Save.
Best,
Bill
www.bills.com/
The Latest on Mortgage Rates
No surprise that mortgage rates fluctuate. If you are thinking about purchasing a home or maybe considering refinancing your current mortgage, then you want to be up to date on mortgage rates.
Mortgage rates April 10, 2024
According to Freddie Mac, the 30-year mortgage rate for the week of April 10, 2024 stands at 6.88%. This 6 basis points increase from the previous week's rate.
Additionally, Freddie Mac reports that the 15-year mortgage rate for April 10, 2024 is 6.16%, indicating a 10 basis points increase from previous week’s rates.
Note: A basis point is equal to one-hundredth of one percent (0.01%). In numerical terms, if the mortgage rate changes by 20 basis points, it means the rate has changed by 0.20%.
What does the mortgage rate mean for you?
Mortgage rates are one of the key factors that determine your monthly payment. Here are avergage interest rates (APR) for April 14, 2024 based on Zillow date for borrowers with a high credit score (680-740) in the United States:
- 30-year conventional loan is 7.09%
- 15-year conventional loan is 6.29%
Using the rates mentioned above, the monthly payment for a $279,082 30-year-year mortgage would be $1,874. A 15-year mortgage would require a monthly payment of around $2,399.
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To make your life easier, we highly recommend shopping around for mortgages and getting pre-approved. This will streamline the home-buying or refinancing process and make it a breeze. Ready to get started? Check Out mortgage rates now for the best options available.
