Lenders look at your DTI ratio to determine how much you can afford based on the loan you apply for. Most loan programs allow for a maximum DTI ratio between 41% and 45%.
Mortgage rates have come down since their high of 7.08% near the end of 2022, but fluctuated slightly between the beginning of this year and the end of February. Our experts predict that, barring an unexpected increase in inflation. mortgage rates will land in the realm of 6.5% over the coming months.
The past few years have given us rising interest rates, which in the fall of 2022 exceeded 7% for the first time in more than 20 years. Since then we’ve seen rates come down a bit and, in the first few months of 2023, hover between 6.09% and 6.73%. While these rates aren’t exceptionally high from a historical perspective, they can be challenging to deal with — especially when combined with a national housing market beset by inventory shortages and, as a result, high home prices and reduced affordability.
For those seeking the lowest possible entry point, adjustable-rate mortgages (ARMs) hold great appeal since they tend to offer the lowest interest rates and monthly payments during their introductory periods. Buyers have shown a growing interest in ARMs over the past few years, and offers for ARMs more than tripled on the LendingTree platform between the first half of 2021 and the first half of 2022.
Conventional ARM loan rate changes in 2023Starting May 1, 2023, borrowers taking out conventional loans with adjustable rates might have to pay an extra fee at closing or face higher interest rates. The fee will only apply to borrowers taking out an ARM with a loan-to-value (LTV) ratio higher than 90% and will be calculated at 0.25% of the loan amount.
Here are seven simple steps you can take to get the lowest 30-year fixed mortgage rates.
Work on your credit score.
Borrowers with credit scores of 740 or higher typically receive the lowest interest rates. For conventional loans, starting May 2023 those with a 780 score or higher will see the best rates. Paying off credit card balances and making payments on time will help keep your credit scores in good shape.
Make a bigger down payment.
Lenders often charge higher rates for low-down-payment loans because there’s more risk the borrower might default. Adding some extra cash to your down payment will help reduce that risk and usually snag you a lower rate.
Avoid tapping too much equity.
Lenders typically charge a premium for a cash-out refinance compared to a rate-reduction refi because there’s a higher risk you’ll default by taking on a bigger mortgage. Borrow only what you need — the extra equity may come in handy later if you suddenly need to sell your home.
Shop with multiple lenders.
Studies have shown that shopping with three to five mortgage lenders can get you a lower rate, which could mean thousands of dollars in savings over 30 years. Rates change daily, so collect your loan estimates on the same day for apples-to-apples comparisons.
Compare APRs, not just interest rates.
Many lenders advertise the interest rates they offer, but you should dig a little deeper as you compare quotes. Annual percentage rates (APRs) are a truer measure of the costs of borrowing with a given loan because an APR includes lender fees and closing costs, in addition to the interest rate.
Pay mortgage points.
The cost to buy one point is equal to 1% of your loan amount. Paying mortgage points lowers your mortgage rate, which can save you thousands of dollars in interest over the life of your loan. Just make sure you calculate your break-even point — if you don’t plan to stay in your home long enough to recoup the cost of the discount points, buying them isn’t a good idea.
Reduce your debt-to-income (DTI) ratio.
Beginning Aug. 1, 2023, conventional loan borrowers will pay an extra fee or be charged a higher interest rate if their DTI ratio is higher than 40% and they’re borrowing more than 60% of their home’s value.
Here’s an example comparing the potential monthly payments on a 30-year fixed-rate mortgage versus a 5/1 ARM used to buy a $350,000 home with a $50,000 down payment. As you can see in the table below, if you chose a 5/1 ARM you could enjoy monthly payments that are $176 cheaper for the first five years.
| Rate | Monthly payment (principal and interest) | |
|---|---|---|
| 30-year fixed | 6.875% | $1,970.79 |
| 5/1 ARM | 5.98% | $1,794.80 |
If you’d like to do further calculations comparing loans with different rates, use the mortgage calculator below:
Lenders look at your DTI ratio to determine how much you can afford based on the loan you apply for. Most loan programs allow for a maximum DTI ratio between 41% and 45%.
Once you’ve received a loan estimate that fits your needs, you should ask for a rate lock. Provide the requested loan paperwork quickly so your loan closes before the rate expires and you avoid costly extension fees.
A lender credit is a cash credit your lender may offer to cover some or all of your closing costs if you’re willing to pay a higher interest rate. Although you’ll save money at closing, you’ll spend more on interest charges over the life of your loan. If closing costs are the only thing standing between you and homeownership, however, lender credits may be worth considering