# Mortgage Comparison

Mark Cappel
UpdatedMay 20, 2024

## 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.

I hope this information helps you Find. Learn & Save.

Best,

Bill

www.bills.com/

### Mortgage market: a pulse check

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 is 6.88%. This represents a 6 basis points increase from the previous week's rate.
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%.
According to Freddie Mac, the 15-year mortgage rate for April 10, 2024 is 6.16%. This is a 10 basis points increase from last week’s rates.

What does the mortgage rate mean for you?
Mortgage rates play a vital role in determining your monthly payment. Let's take a look at the avergage interest rates (APR) for April 14, 2024 based on Zillow data for borrowers with a high credit score (680-740) in the United States:

• For a 30-year conventional loan, the interest rate is 7.09%.
• If you opt for a 15-year conventional loan, the interest rate stands at 6.29%.
Using the rates mentioned above, a \$279,082 30-year-year mortgage would result in a monthly payment of \$1,874. On the other hand, a 15-year mortgage would require a monthly payment of approximately \$2,399.

Simplify your mortgage journey: Shop around and get pre-approved today!
To make the home-buying or refinancing process a breeze, we highly recommend shopping around for mortgages and getting pre-approved. So, why not Check Out mortgage rates now for the best options available.

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