You’ve heard the news- mortgage rates surpassed 5% and don’t appear to be coming back down anytime soon. While that’s up for debate, the tren is clearly not your friend when it comes to securing a low interest rate on your home loan.
So what do you do? It’s time to be a little more thoughtful. Gone are the days of 3% fixed-rate mortgages for everyone, thus you have to approach things differently. Now more than ever, it’s crucial that you get all the details right when applying for a mortgage to ensure you receive the lowest rate available.
Shop Around
You have to take the time to compare rates and lenders if you want to secure the lowest interest rate on your mortgage. A recent study from Freddie Mac revealed that getting just two quotes as opposed to one could save you thousands. It actually gets even better the more you shop. Sure, it’s not the most exciting thing but neigh is paying a sky-high mortgage.
Improve Your Credit
Also a cliche in the mortgage industry, but a very real and important tip. It’s no secret that those with higher credit scores gain access to lower interest rates. So if you’re not doing your absolute best credit score-wise, you’re doing yourself a disservice. Take the time to work on your credit if it’s not where it should be.
Generally, a 760+ FICO score is sufficient to obtain the lowest mortgage rates possible, at least when it comes to your credit score. Aim for a score of at least 760 if you want to save money on your mortgage.
Come in With a Larger Down Payment
While perhaps not as easy as maintaining excellent credit history, a larger down payment can result in a lower mortgage rate, which will save you money each month for a long time. Not everyone has extra money lying around to do this, but if you do, or you can save more before buying, it can work to your benefit when it comes time to apply for a mortgage.
Those who are able to put down 20% or more can obtain lower interest rates and avoid mortgage insurance at the same time. It’s actually a triple bonus because you avoid pricing adjustments, PMI, and, wind up with a lower loan amount.
Pay Some Points
While somewhat counterintuitive, if you pay now you can save later on your mortgage. What we mean by that is agreeing to pay discount points at closing. They’re basically a form of prepaid interest that will lower your interest rate for the life of your loan.
For example, if the 30-year fixed is pricing a 5.125%, but you can pay 1% of the loan amount today for a rate of 4,875%, it could save you a lot more money over the duration of the loan term.
Just be sure it makes sense financially, and that you plan to stay in the home/ mortgage long enough to recoup the upfront cost.
Consider All Loan Programs
Yes, the 30-year fixed is in the 5% range now, but it is not the only loan program available. There are several different home loan types out there, many with lower interest rates than the 30-year fixed.
For example, the 15- year fixed prices are closer to 4%, and adjustable-rate mortgages like the 5/1 and 7/1 ARM are also significantly cheaper. They also provide a fixed rate for several years before you have to fret about a rate adjustment.
Consider an ARM if you want to save money, especially if you don’t plan on staying in the property for a long period of time.
Negotiate Harder
You can negotiate mortgage rates and fees. Maybe not all banks and lenders allow you to do this, but many do. if you don’t bother attempting to negotiate, you’ll never know what’s possible. If the lender says they can’t budge, move on to one that will.
Never accept the first price you’re shown, like anything else in this world. it doesn’t hurt to ask, especially when it comes to a mortgage. After all, you could be saving money every month for the next 30 years.
Lower Your Max Purchase Price
if you want to save money, you might have to make some concessions. That could mean lowering your max purchase price if you’re in the market to buy a home. While there’s no clear correlation between home prices and mortgage rates, a higher home price will obviously drive up your monthly housing payment. Either lower your max bid or negotiate more with the seller or do both. If you can secure a lower purchase price, you’ll need less mortgage. That lower loan amount will save you money.
Consider a Second Mortgage
back in the early 2000’s, it was common to take out a first and second mortgage concurrently, with the latter knower as a piggyback mortgage. The purpose was to keep the first mortgage at a loan-to-value of 80%, thereby avoiding PMI. This method could also be employed to stay at/below the conforming loan limit.
If you’re down payment is limited, it could make sense to take on a second mortgage to save some dough. The blended rate between first and second mortgage sans PMI and higher pricing adjustments could just be the ticket to savings.
Pay It Back Faster
If rates are high, it makes sense to pay back the mortgage faster. The faster you pay, the less interest you pay. You basically want to pay back a low-rate mortgage as slowly as possible, and a high-rate mortgage as quickly as possible, assuming there aren’t better places for your money.
So if you get stuck with a pesky 5% mortgage rate, which is actually pretty decent historically, you can make extra payments each month to lessen the blow. You could actually pay enough to offset the higher rate and effectively turn it into a 4% mortgage rate.
Let It Ride
Lastly, you could wait things out and/ or float your mortgage rate if you’ve already applied. You don’t have to accept today’s rates if you’re not entirely happy with them.
Sure, most folks expect mortgage rates to move even higher in the near term. Typically when new highs are being tested, there are periods of relief along the way. They may not last very long, but it is possible to experience dips and opportunities.
Of course, this can be a risky game to play. But if we’re talking about a refinance, which is entire;y optional, you can bide your time and only strike when the timing is right.
