Whether you’re ready to buy a home or hoping to refinance, current mortgage interest rates have kept some families sidelined from the housing market. With economic forecasts predicting that mortgage rates will go down by the end of 2024, what can future homebuyers do now to get ready?
Stay ahead of the market and follow these five steps on how to prepare for mortgage rates to drop.
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What are current mortgage rates?
Mortgage rates today have stayed on average around the 7% mark. To curb inflation, the Federal Reserve aggressively raised the federal funds rate in July 2023. This elevated federal funds rate has held firm through 2024, resulting in higher interest rates.
As we near the fall of 2024, inflation numbers are looking to begin a decline, which could result in the Fed lowering the federal funds rate. When this happens, mortgage rates tend to follow.
When will mortgage rates go down?
Get a deep dive into the history and current predictions for mortgage rates today. Track key predictors and upcoming important dates.
Five ways to prepare for mortgage rates to go down
If you’re waiting for mortgage rates to drop before entering the housing market, here are five ways to start getting ready now.
1. Improve your credit score
A credit score is the numerical representation of your creditworthiness, typically ranging from 300 to 850. It is calculated based on various factors from your credit report. Mortgage lenders use credit scores to assess the risk of lending money or extending credit to a borrower.
An improved credit score can offer several advantages when buying a home, including lower interest rates, better loan options, lower monthly payments and better negotiating power.
To improve your credit score, explore your ability to:
- Pay bills on time: Your payment history has the biggest impact on your credit score. Ensure you pay all your bills, including credit card payments, loans, utilities, and rent, on time.
- Reduce debt: Pay down the balances on your credit cards and other revolving credit. Aim to keep your credit utilization ratio below 30% of your available credit.
- Avoid opening new credit accounts: Each new credit inquiry can slightly lower your score. Only apply for new credit when necessary.
- Check your credit report for errors: Regularly review your credit report to ensure all information is accurate. Dispute any errors with the credit bureaus to have them corrected.
2. Assess your debt-to-income ratio
Your debt-to-income (DTI) ratio is a financial metric used by mortgage lenders to assess your ability to manage monthly payments. It compares your monthly debt payments to your gross monthly income.
Maintaining a healthy DTI ratio is important for qualifying for a mortgage and securing favorable loan terms.
To find your DTI ratio, divide your gross monthly income by your total monthly debt payments and multiply by 100.
Example: Your total monthly debt payments amount to $1,500 and your gross monthly income is $5,000. In this scenario, your debt-to-income ratio would be:
1,500 ÷ 5,000 = 0.3 X 100 = 30%
To improve your debt-to-income ratio, consider the options below.
- Reduce debt: Pay down existing debt to lower your monthly debt payments. Focus on high-interest debts first.
- Increase income: Boost your gross monthly income by seeking a raise, taking on a second job, or exploring other income sources.
- Avoid new debt: Refrain from taking on new debt before applying for a mortgage, as new debt will increase your DTI ratio.
- Budgeting: Create a budget to manage your expenses and ensure you have enough income to cover debt payments and other essential costs.
3. Save for a down payment
One of the most productive ways to take advantage of the time you may be waiting before entering the housing market is to save for your down payment. A down payment is an upfront payment made by a buyer towards the purchase price of a home.
The more you can put toward your down payment, the less you’ll need to borrow from a mortgage lender. This can impact the mortgage interest rate offered to you and lower monthly payments. A larger down payment can also potentially eliminate the need for private mortgage insurance (PMI), further reducing your monthly payment.
A few tips to help you save for a down payment include:
- Create a budget: Track your income and expenses to identify areas where you can cut back and save more.
- Set a savings goal: Determine how much you need to save for your down payment and set a realistic timeline.
- Open a dedicated savings account: Keep your down payment funds separate from your regular spending money to avoid temptation.
- Automate savings: Set up automatic transfers to your savings account to ensure consistent contributions.
- Live below your means: Adopt a more frugal lifestyle to maximize your savings potential.
In addition to funds for your down payment, you’ll also want to consider how much you have saved for your closing costs and some of the initial startup funds for getting your new home together.
4. Explore your loan options
There are several mortgage loan products and programs available to fit a number of different financial situations. Whether you are looking to buy, refinance, tap into your home equity or explore a renovation or new construction – each scenario may have accommodations to fit your unique needs.
If the typical requirements for a conventional loan feel unattainable, consider the alternatives.
- FHA loans: Backed by the Federal Housing Administration, FHA loans are designed for low-to-moderate-income borrowers with less stringent credit score requirements and lower down payment options compared to conventional loans.
- VA loans: Exclusively for Veterans, Active-Duty Service Members, and eligible Surviving Spouses, VA loans offer benefits such as no down payment, no private mortgage insurance (PMI), and competitive interest rates, making homeownership more accessible for those who have served.
- USDA loans: The U.S. Department of Agriculture offers these USDA loans to rural and suburban homebuyers with low-to-moderate incomes, featuring no down payment and low interest rates, aiming to promote homeownership in less densely populated areas.
- Non-QM loans: Non-Qualified Mortgage (Non-QM) loans cater to borrowers with unique financial situations, such as self-employed individuals or those with non-traditional income sources, providing more flexible underwriting standards than conventional loans.
- Down payment assistance: Various down payment assistance programs are available to help eligible homebuyers with the cost of their down payment, offering grants, low-interest loans, or forgivable loans to make homeownership more attainable, particularly for first-time buyers or those with financial constraints.
5. Connect with a mortgage loan officer
As we reviewed, there are many financial factors to consider as you prepare for mortgage rates to drop in 2024, from your credit score and debt-to-income ratio to the down payment you have available and which loan product best fits your needs.
The good news is that a mortgage loan officer is here to help. They get to know your unique financial scenario and give the best personal advice to help you map out the months ahead. They will call out which key factors would have the biggest impact on your future as a homebuyer.
With an expert knowledge of the loan types and programs available, they can match you to the most ideal loan option for your situation.
You don’t need to wait for mortgage rates to go down before getting in touch with a loan officer. They’re available to work with you now to help you prepare for when rates may potentially drop.
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Don’t wait to get started
While lower mortgage rates can make homebuying more affordable, it’s not always worth waiting if it means missing out on a home you really want. Work with a local loan officer to explore the long-term benefits of entering the housing market before rates drop. Depending on the current market conditions in your area and your personal financial situation, there may be opportunities for you today.