One of the most important elements of finding out how much home you can afford is the mortgage rate that is available when you buy your home. Small movements in the mortgage rate can have a huge impact on your monthly payments and the amount of interest you pay during the life of your loan. Since most mortgages are amortized over 30 years, seemingly small differences in interest rates can really add up, while a smart refinancing can save a bundle.
The financial crisis of 2008 ushered in a time of tight controls over lending coupled with very low mortgage rates in order to juice the housing market following the many foreclosures and market corrections. From mid-2008 rates near 6.5%, we began to drop into the high 4’s. Since 2012 mortgage rates have fluctuated between the high 3’s and low 4’s.
Starting with the 2016 election, mortgage rates have begun to rise again, and are currently around 4.125%. While some analysts predict that rates are on an upward climb again, much depends on the overall economy. The Federal Reserve does not like to push rates upward if the rest of the economy is not growing as well, since it tends to have a dampening effect on home sales, further weakening the economy.
Looking to improve your odds of getting a better mortgage rate? Here are some ways to ensure you’re getting the best possible deal.
- Find a lender you can trust: So much depends on communicating with a great lender. They will have insight into the trends, products, and timeline that will help you get a great rate (and save money). And they may even know of grants and programs to pay your down payment, closing costs, and more, especially if you are a first-time homebuyer, buying in a neighborhood that is undergoing gentrification, or if you are buying a fixer-upper.
- Think beyond Conventional: Consider mortgage products like FHA and VA loans which require less money down and often have lower interest rates than Conventional Loans. They may have more requirements and additional restrictions, but the lower rate over time and the ability to reserve some of your up-front cash might make them a better option.
- Think outside the 30-year box: Not sure if this is your forever home? Consider a 15 year mortgage which often has a lower interest rate and, because the term is shorter, builds equity much faster than a 30-year loan. While your monthly payment will be higher, you will be building wealth in half the time.
- Planning to move within five years but want to own? Check out a 5/1 ARM which features very low, fixed interest rates for the first five years of the loan, then changes to an adjustable rate mortgage. One caveat: Ensure there are no pre-payment penalties if you sell or pay off the mortgage before the five-year mark. Also, ensure that if your plans change you can refinance into a longer-term loan if you hit that five-year anniversary.
- Optimize your overall financial picture: Ensure that your debt-to-income ratio is at the best possible level before you apply for your mortgage. Pay off debt, save up cash reserves, and ensure that you keep meticulous records. The better your credit, the better the interest rate and terms.
- Be very careful with purchases while you are in the mortgage process. When we find that dream home, we may feel the desire to go out and buy furniture, appliances, or other items so that everything will be ready when it’s time to move in. But such purchases, especially if bought on credit or if new credit accounts are created, can be disastrous during the mortgage process. Wait until your lender gives the all-clear and discuss any potential purchases with the lender first.
A home purchase can be a smart, long-term investment, but getting the right financing will make a difference in the way that your financial picture develops. Let your Eng Garcia Grant real estate agent help you find a great financial professional to help you crunch numbers and walk you through the best possible financing scenarios for your home purchase. Call or contact us by signing up through our website and let us get started helping you get the best deal on the home of your dreams.