Nov. 27, 2018.
Tracking mortgage rates can be a headache. But for the 88 percent of homebuyers who finance, keeping an eye on home loan rates to find a drop could be enough to lower your monthly payment. There are also six ways to help make your rate cheaper, no matter what the market’s doing.
Save money with 6 rate-lowering strategies
Choosing a fixed-rate mortgage is another popular decision for 92 percent of homebuyers. A fixed-rate mortgage is normally favored over an adjustable-rate mortgage because you can count on your mortgage rate to stay the same, unless you refinance. It’s beneficial, and it also adds some pressure. Homebuyers who opt for a fixed-rate mortgage are looking for a really competitive rate that they’ll be happy with long-term.
Mortgage rates are also unpredictable. Rates recently hit a seven-week low before beginning another climb. That’s a great example of why it may not make much sense to track mortgage rates daily. Having a general sense of the latest home loan rates is all you need to make a comfortable homebuying decision.
You can also use six tips to help lower your mortgage rate and make homebuying cheaper:
1. Get a rate quote.
Comparing mortgage rates is critical. A 2018 Freddie Mac survey found that shopping around could save you anywhere from $1,500 to $3,000 over the life of your mortgage. When you do, don’t rely on sites that spit out boilerplate quotes. Connect with a local lender who can provide an individualized rate quote instead. This quote should include numbers that reflect your personal financing needs and a lender’s specific loan fees so you know exactly what you’re getting into.
Remember, a rate quote is based on your unique profile and financial situation. Rates reported in the media are just source material. Those rates may also be expired by the time you read them. Always insist on getting a full written term sheet that shows the interest rate, loan term, total monthly payment (including insurance and taxes), total cash-to-close, and line item list of closing costs before you lock your rate with a lender.
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2. Improve your credit score.
myFICO has a handy little tool that can tell you how much your credit score could earn you in a mortgage rate. These numbers are set at the national average, with plenty of variables that can change based on location, personal finances, loan type, down payment, and more.
But, a healthy credit score might nab you a mortgage rate that’s over 1.5 percent lower, potentially saving you $296 a month on your mortgage. Many loans have flexible credit requirements and are friendly to first-time buyers, but putting the extra effort into cleaning up your credit may save you $3,552 a year.
3. Increase your down payment.
There’s no longer a hard-and-fast rule that says you have to put 20 percent down on a house. Less than half of all buyers are doing it. But if you have it, consider using it. A larger down payment can lower the mortgage rate you qualify for. About 61 percent of homebuyers draw their down payment from their savings, and 35 percent put down sales money from a previous home.
A higher down payment comes with a lower loan-to-value (LTV) ratio that decreases your risk to a lender. And, a lower LTV may come with a lower rate.
4. Decrease your DTI (Debt-to-Income Ratio).
Your DTI, or Debt-to-Income Ratio, is how much monthly income you pay toward debt, calculated as a percentage. This number also includes your estimated monthly mortgage payment for the future. Too much debt, as you may gather, increases your risk to a lender. A favorable DTI sits below 36 percent, though last year, Fannie Mae and Freddie Mac increased their debt-to-income limits from 45 to 50 percent to make borrowing easier.
Increasing income, paying down debt, and postponing large purchases are all ways to keep your DTI on the low end and potentially reduce your mortgage rate.
5. Use a rate lock.
Another way to leverage a lower rate is to get a guaranteed rate lock. Consider locking your mortgage rate for up to 270 days if you’re buying a new build or moving from one home to the next.* The Federal Reserve has hiked its benchmark rate several times this year, with more rate rises expected that will impact mortgage rates indirectly. So, locking a rate now can be a smart move.
For instance, you might save $77 month by locking in a $250,000 loan at a 30-year fixed rate of 5 percent/5.2 percent Annual Percentage Rate with a $1,342 monthly payment, compared to the same loan scenario with a 5.7 percent Annual Percentage Rate, a $1,419 monthly payment, and just a half-point interest rate increase.**
6. Don’t wait.
Today’s historically low mortgage rates are still good news for buyers. They’re sitting at 4.81 percent, a far cry from the peaks of over 18 percent seen in the 1980s.
Rates may drop temporarily before rising again, as Freddie Mac’s Chief Economist predicted. Rates are expected to reach an average of 5.1 percent in 2019 and 5.6 percent in 2020. Buying during a dip, as we’re seeing now, may make your monthly mortgage payment that much cheaper.
The lower the rate, the more house you can get
Using any of these tips to lock in a low rate could move you up to a higher price range. With a lower rate comes more buying power, so you might be able to afford more than you first thought — without having to change your financial situation. Getting a jump on lower rates can be easy: Download LoanFly, find out how much house you can afford, and fly home faster.
*Not a commitment to lend. Borrower must meet qualification criteria. Equal Housing Opportunity.
**MBS Highway payment estimate, 2018. Rates listed are for illustrative purposes only.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.