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After climbing above 6% in June, 30-year fixed mortgages now sit at 5.46%, according to Bankrate data from August 10. Meanwhile, the national average for 15-year fixed-rate mortgage loans is 4.93%. ( See the lowest mortgage rates you can get now here ).
How to get a lower mortgage rate
If you can afford to shorten your loan term, do it: 15-year mortgage rates are lower than 30-year mortgage rates. It also may be worth considering an adjustable rate mortgage (ARM), 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 4.19%, substantially lower at the start than both the 15-year and 30-year fixed rate mortgages.
But it’s important to note that 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.
Whether you get a 15-year fixed, 30-year fixed or an ARM, experts recommend shopping around, getting quotes from 3 to 5 lenders. It’s also key to figure out your credit score (and improve it if needed) and your 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.
There are also other ways to decrease your mortgage rate like using discount points, which are fees paid to reduce an interest rate. 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.