BBorrowers have no say in the direction of interest rates. Supply and demand, which includes the US Federal Reserve, determines rates, including mortgage rates.
But individual borrowers can be in control of their individual loans, and the decisions they make can help them secure the lowest financing rate possible. Some information may be common sense, some may not be, but all of them will help you make the right home loan decision.
Actions you can take
For example, make a larger down payment. Increasing the down payment decreases the amount borrowed and therefore the monthly payment. Borrowing $195,000 instead of $200,000 at 3.5% will reduce the monthly payment by $22.00 and save $8,084 in interest over the life of the loan.
People who are currently renters and have been working for a few years have had the opportunity to increase their savings rate to unprecedented levels. Maybe it’s time to put that money to work. And, again, increasing the amount of money for a down payment gives direct results.
Borrowers should also work on improving their credit score. Lenders generally offer lower rates to borrowers with higher credit scores. Did you know that you have 14 days to “shop around” before any credit inquiries affect your credit score? This is a good topic to ask your loan officer when working with closing costs and other factors.
Using cash savings in your bank account, which at this point are probably earning close to 0%, to pay off credit card, car, or medical debt with possibly teenage rates is a very good use of capital. And it will help you boost that credit rating.
Also ask your lender to offer to “cut” the rate. This involves points, which are one-time fees paid in advance. Paying discount points will lower the interest rate for the life of the loan, and one point is equal to one percent of the loan amount.
For example, on a $300,000 loan, one point is worth $3,000. In exchange, the rate will be reduced by one eighth to one quarter of a percent for each point paid. If you’re going to be staying at home for a long time, it makes sense to pay points.
Rates, relationships and lock
Of course, borrowers should seek out a lender that offers the best products, services, and prices suited to individual borrowers. And it’s important to choose a lender and lending professional you’re comfortable with and communicate well with. Once you’ve started the loan process with your chosen lender, lock in your interest rate. Locking the rate at the start of the transaction ensures that the rate will not increase during the loan process, which can take 30-45 days.
Many lenders lock a rate for 30-45 days at no charge and charge around two basis points per day to extend the lock beyond the initial period. A basis point is equal to one hundredth of one percent. Using this formula, extending a hold for an additional 30 days would cost the borrower approximately six-tenths of one percent of the loan amount.
“Maturity” and assistance
Borrowers should be aware that a 30-year mortgage is not the only “term” for a home loan. Ask your loan originator for a lower loan term. Mortgage rates for 15 year loans are lower than rates for 20 or 30 year loans, and adjustable rate mortgages, often with a fixed term of 5 or 7 years, have an even lower rate.
This is where a qualified loan officer working for a reputable lender is important. They will take the time to work with you on the different options.
Loan officers will also explain down payment assistance programs. These are usually local programs designed for certain segments of the population. Down payment assistance is like “found money” for a first-time home buyer, with terms being very generous and some programs even forgiving the amount over time.
Spring: Refi or Modify?
As we enter the spring of 2022, many borrowers can still benefit from refinancing. Refinancing a loan for a one percent rate difference is a rough rule of thumb, with a two percent difference being something every borrower should do.
And if interest rates rise much more, adjustable rate mortgages will start to rise this year, so it might be time to refinance to a fixed rate product. Your monthly statement from the company servicing the loan should show your current interest rate.
Before refinancing, however, talk to your lender. The benefits will depend on your personal situation. Maybe you’ll only be staying in your home for a year or two, or maybe you’re going through a divorce and need another loan. Paying off your new mortgage before enough time has passed to recoup the cost of getting the mortgage certainly wouldn’t be worth it.
Some lenders, especially those who service your mortgage each month and handle monthly payments, have the ability to “change” the note, lower the interest rate, and pay with the stroke of a pen.
These simple considerations and moves can make the difference of hundreds of dollars a month in your payment. So while interest rates – including mortgage rates – are set to rise in 2022, borrowers have the opportunity to make decisions now to help counter any rate swings.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
