The U.S. experienced record-low mortgage rates during the pandemic. However, in 2022, mortgage rates are rising again, making some buyers wary of getting a home. However, there are steps you can take to combat the rising rates and still find a great home! If you’re a prospective homebuyer, these tips are for you!
Shop Multiple Lenders
If you really want to find the best rate on your preferred loan program, don’t just settle with 1 lender and be done. Be sure to shop around – each lender has their own approach to pricing loans – so you can find which can offer the best interest rate. Shopping around can also help you make lenders fight for your business, and you can try to negotiate a lower rate.
Lock In Your Rate
Did you know you can lock in your interest rate before you close on your loan? In fact, you can lock it in up until 5 days before you close! In the current market where interest rates are rising, the sooner you lock in that rate, the better. Usually, most lenders will allow you to lock your rate between 30 and 60 days without charging a fee.
Aim For A Bigger Down Payment
In this market, there are pros and cons to a larger down payment. Having a lower down payment can help you obtain a home and keep more cash in reserve, but you’ll have a higher monthly payment. If the rising mortgage rates result in a monthly payment that is out of your budget, then put in a larger down payment. Having a larger down payment will sting at first, but in the long-term it will help offset the cost effects of higher mortgage rates.
Conventional Mortgage Over FHA
There are appeals to choosing an FHA home loan over a conventional loan. FHA loans will applicants with a credit score of 580 or more and require lower down payment amounts. FHA loans can definitely save you money upfront, but over time you can end up paying more than with a conventional loan. FHA loans require an upfront mortgage insurance premium and an annual premium. The upfront premium is 1.75% of your loan amount, and the annual can range from 0.45% to 1.05% of the loan. Due to these added costs, your mortgage can become less affordable than a conventional loan. Additionally, if you choose an FHA loan, you will not be able to get rid of your mortgage insurance premiums unless you refinance.
Finance With An Adjustable-Rate
Another alternative to offset the cost of a higher mortgage is to finance with an adjustable-rate mortgage over a fixed-rate. Adjustable-rate mortgages, or ARMs, offer a fixed rate for a certain period, then have annual rate adjustments. The 3 common types of ARMs are 5/1, 7/1, and 10/1, the first number being how many years you’ll have a fixed rate, and the second how often your rate will adjust yearly afterwards. ARMs also typically start off with lower rates than a fixed-rate mortgage. However, choosing an ARM need careful thinking before diving in, as the rates for these loans can fluctuate significantly after your initial fixed period, making it a little more of a risk for buyers. If you plan to live in your next home for only a few years, then an ARM is right for you, but if you plan on staying long-term, a fixed rate is better.
Discount points aka mortgage points, offer you a trade-off when aiding in mortgage interest rates. They allow you to pay more money upfront in exchange for lower interest rates. Each discount point costs 1% of your total loan amount. In general rule is for every discount point you purchase, you can buy your interest rate down by 25 basis points, or 0.25%. It’s key to know that lenders can set their own pricing for discount points, so the potential savings can vary depending on the mortgage company. And keep in mind that discount points will increase your closing costs.
If you’re not sure if purchasing points are for you, determine your breakeven point. Divide your buydown cost by the monthly savings to calculate it. The breakeven point determines how long you would need to stay in the property to recoup your buydown cost.
Expand Your Search
If you are a buyer that has been on the hunt for a while in a small, specific area, and have been unable to find one in your budget, it may be time to expand your search and become more open to nearby areas. For example, the outer suburbs tend to have less expensive properties, which will have lower property taxes as well. Also look into Homeowner’s Association fees between neighborhoods you have your eye on – sometimes there is a huge difference in the cost.
Improve Your Credit
Often, having a great credit score will help you secure the best mortgage rate. You can still get approved and obtained for loans if your credit isn’t at its best, but lenders tend to reserve the best rates for borrowers with credit scores starting in the mid-700s. They see applicants with high scores as less risk, so they will offer the best option available.
Improving your credit doesn’t happen overnight, so consider this option if you have some time before taking the plunge to buy a home. Even a small reduction in your interest rate can return significant savings in the long term! To determine where your credit lies, use a free credit monitoring service to see your FICO score, which provides a general idea of your over credit history and health. Paying down any debts, other loans, and cutting card balances can all help improve your credit score.
Consider Shorter-Terms Loans
The traditional mortgage term is 30 years, and the most popular among homebuyers. However, many lenders offer shorter terms, such as 15 or 20 years. Committing to a shorter-term loan can lower your interest rate. You will also pay much less interest over time compared to a 30-year loan, which in turn allows you to build your home equity faster. However, if you are considering this option, research your financial standing before you commit. Be sure to carefully review the numbers to be sure that you can afford a higher mortgage payment along with all of your other life expenses.
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