How to Take Advantage of the Mortgage Rates of a Lifetime

posted on 06-07-2019

If you manage to lock in these low rates on a home mortgage -- the lowest we've seen in six decades -- you can literally save thousands of dollars over the life of the loan.

The constantly changing average interest rate on a 30-year fixed rate mortgage is currently hovering near 4.23%, but only the most qualified borrowers are able to lock in these rates. 

Here's why: you have to pay a 20% down payment in order to qualify, and few people -- even those with excellent credit -- can afford the expense. 

According to an Associated Press analysis of FICO data and the National Foundation for Credit Counseling, around 40% of Americans have excellent credit ratings, but fewer than 50% say they can afford to save for down payments.

This might be the best time in most Americans' lives to invest in a home, but most can't afford it. They also can't afford not to…

Crunching the (Magic) Numbers

A fixed rate, 30-year loan for a $250,000 home with a 4.23% interest rate has a monthly payment of $1,226.92, with $191,692.77 in interest paid over the lifetime of the loan. 

[For help crunching your numbers, check out our Mortgage Calculator for Fixed Rate Mortgages]

Compare that with a slightly higher 4.75% interest rate, which has a monthly payment of $1,304.12. That is not much of a difference monthly, but over 30 years, the interest you pay ends up being $219,482.60 – a difference of $27,789.83. 

At a fixed rate of 5%, the numbers balloon to $1,342.05 a month and $233,139.46 in interest over the course of the loan -- a difference of $41,446.69. 

The numbers keep growing, as illustrated in the chart below:

Qualifying for these historically low interest rates requires you hit the magic numbers -- a credit rating greater than 760 and a down payment of 20%. Here are steps you can take to ensure you have the best chance of being approved.

Start Saving for the Down Payment Now (If You Haven't Already)

Down payments can be steep, especially if the house you want is expensive. For a $250,000 house, a 20% down payment is $50,000. It takes most people quite a while to save that much money, so if you haven't already started saving, now is an ideal time. 

Think of the cash you will save with a low interest rate as a long-term investment. Remember, a lower interest rate can save $41,500 over 30 years, or approximately $1,400 a year. Isn't that worth tightening your budget now for that kind of savings later?

A 20% down payment also means that you don't have to pay private mortgage insurance (PMI), which offsets losses to lenders if you are unable to repay their loan. PMI costs between $50 and $80 per month.

Keep Your Credit Card Balances Low

One factor used to determine your FICO score is the amount of credit extended to you and how much of it you are utilizing. The powers that determine your credit score prefer you exercise your credit, but to a certain extent.

People awarded a credit score of 760 or greater typically have a balance on their credit cards that represent 7% of their card limits.

If you have $10,000 worth of credit on your credit card but continually run a balance at $700 or less, you have a much better chance of being awarded a credit score at or near that magic number 760.

[For more on credit card balances, read 10 Ways to Dig Yourself Out of Credit Card Debt]

#-ad_banner_2-#Extend Your Credit Limit

If paying off your credit card balances is impossible, you can help improve your debt-to-credit ratio by asking one of your credit issuers to increase your credit limit. This will effectively decrease your debt ratio and help your credit rating. 

Just make sure you request that they don't check your credit in the process. Each credit check done has the potential to ding your credit rating, so limiting them is vital.

[For more on building and extending your credit, read 7 Steps to Perfect Credit]

…But Don’t Apply For New Credit Cards

Your credit score will be affected by new credit in many ways, and not all of them are good for your score. That means getting new credit cards in an effort to boost your score might hurt instead of help. 

Every time you apply for a new credit card, your credit gets run by the credit card company. As we stated earlier, every credit check puts a ding in your score. When determining your credit score, FICO looks at the number of accounts open, the number of credit inquiries and time since the credit inquiries. 

Too many inquiries could negatively affect your score when trying to get approved for a 30-year fixed-rate mortgage.

[To avoid unintentionally hurting your credit, read 9 Seemingly Innocent Ways to Severely Damage Your Credit Score]

The Investing Answer: If you are able to hit the magic numbers -- 20% down payment and a 760 FICO score -- you may just qualify for the lowest interest rate of your lifetime. A tighter budget and some credit building tactics over the short-term can result in a historically low mortgage rate and thousands of dollars in savings over the long-term.

Photo courtesy of Flickr.

by Christian Hudspeth What's even better than earning rewards for spending on your credit cards? Getting paid hundreds of dollars worth in sign-up bonuses in three months or sooner -- just for tr...
by Christian Hudspeth Tired of dragging credit card debt around with you? Taking 15 minutes to transfer your debt to a credit card with generous balance transfer perks could save you thousands in...
by Christian Hudspeth If you're going to spend money anyway, then why not get paid for it?Whether you're looking for credit cards with up to 6% cash back, double flight miles, or even a free hote...
by Christian HudspethIn times where interest rates are on the rise, you may start hearing financial advisors and bankers sing the praises of an income strategy called "CD laddering" (short for ce...
by Susan Campbell Those of us familiar with selling property know real estate agents don't come cheap. With real estate agent commission and fees amounting to as much as 6% of the sel...
Beverly Harzog is a nationally recognized credit card expert, author, and consumer advocate. She blogs about credit cards at Being in credit card debt is the pits. I've bee...
by Christian Hudspeth If you haven't already felt the pressure to refinance your mortgage, you're probably really feeling it now. Mortgage rates are still hovering near historic lows. But ...
by Christian Hudspeth If you or someone you know is thinking about getting a home mortgage, you may want to know about the thousands of dollars in hidden charges that some lenders are quietly...
by Christian Hudspeth Money market accounts (MMAs) and savings accounts make great places to set aside your emergency fund money and earn some interest income at the same time.Simply put, these s...
by Christian Hudspeth It's true that auto loans and home loans offer attractively-low annual percentage rates (APRs), while credit cards offer borrowing power without the risk of ever seeing the ...
by Christian HudspethWant to keep your emergency fund safe while earning interest yields that are three to five times higher than a typical savings account? Putting your money into an FDIC-insure...
by Christian Hudspeth Question: Hi there. I need your advice. I'm only 19 and I really need to start investing. Where can I start? -- Tirelo M., Gaborone, Botswana Answer: You've defini...