Mortgage rates are dipping. Back in June, 30-year fixed rates hit 6%, but this month we have watched them fall. Indeed, 30-year fixed mortgages decreased to 5.60%, which is the lowest in weeks, according to the latest Bankrate data from July 28. Meanwhile, the national average for 15-year fixed-rate mortgage loans declined to 4.89%.
How to save on a mortgage
One big move to make is to shorten your loan term, if you can, as rates on 15-year mortgages are significantly lower than 30-year mortgages. Something else to consider? Adjustable rate mortgages (ARM) — but only if it makes sense for your long term plans. The latest Bankrate data shows that average rates on 5/1 ARMS (rates are fixed for five years, then adjust) are 4.18%, significantly lower at the start than both the 15-year and 30-year fixed rate mortgages. But, there’s a caveat: ARMs tend to make the most sense for short-term homeowners who only plan to be in the same home for 5 to 7 years. Because ARM rates become variable, “ARMs can be risky, and in the long run they may end up costing more than a fixed mortgage with a higher upfront rate,” says Jacob Channel, LendingTree’s senior economic analyst, recently told MarketWatch Picks.
Regardless of whether you opt for a 15-year fixed, 30-year fixed or an ARM, experts recommend shopping around, getting quotes from 3 to 5 lenders and figuring out your credit score (improve it if needed) and debt-to-income ratio (DTI), which can help you determine what rate you can expect to pay. To calculate your DTI, divide your monthly debt payments (mortgage; credit card payments; auto, student or personal loans; child support) by your gross monthly income. If the number you come out with is at or below 36%, your chances of qualifying for a mortgage, and at a better rate, are better than if you come out with a higher number as your DTI. (See the lowest mortgage rates you can get now here).
There are also other ways to deflate your mortgage rate, too. Discount points, which are fees paid to reduce an interest rate, can make a difference if you can afford to buy them. Typically, one point decreases the interest rate by 0.25%, though this can vary. “When you pay discount points, you’re handing the lender a chunk of interest payments up front in exchange for paying less interest every month,” Holden Lewis, home and mortgage expert at Nerdwallet, recently told MarketWatch Picks. But note that there may be limits to how many discount points you can buy, and buying points may not make sense, especially if you don’t plan to stay in the home for long.