The financial maelstrom of a slowing China, the slump in oil prices, the decline in stock market values and the absence of inflation expectations in the United States have had one unseen benefit for the housing market: Mortgage rates have been going down.
If you're buying a home, you may be stunned by how low rates are. If you live in a high cost housing market, jumbo loans have been cheap. Jumbo loans are generally above $417,000 and I'm seeing rates where the first digit starts in the mid to upper threes. People who take out jumbo loans generally opt for some kind of variable loan. Right now, though, unless you know beyond a shadow of a doubt that you’ll be there five years or less, I'm advising you to lock in a long-term traditional fixed rate loan. Take advantage of this unusual dip in rates!
If you're not a jumbo loan shopper, the general mortgage market rates are in the three on 30-year loans. The sweetest spot in the market remains 15-year refinances. If you're looking to refinance your loan, 15-year refis have a first digit starting in the twos for those with great credit. What a steal of a deal! The beauty of it is almost everything you pay on a 15-year loan at two percent is going to principal; almost nothing is siphoned off to interest.
Look at your finances before looking at housesBefore you start house-hunting or approaching lenders for pre-qualification, you want to take a look at your own finances. Even with stricter regulations around mortgage lending, most banks will allow you to borrow more than may be financially wise to accept.
You need to decide for yourself how much house you can really afford. Don’t rely on online calculators to tell you. Look at your current budget, expenses, and financial obligations. Then research to determine a realistic total for your living expenses if you become a home owner.
Remember, a mortgage will cost you the principal and interest on the loan -- but you also need to pay homeowner’s insurance and property taxes. Don’t forget to account for increased expenses associated with repairs, regular maintenance, and upkeep.
Looking at your finances will tell you a number of things. You’ll know how much you can truly afford, and from there you’ll know how much you need to save for a down payment. You should also pull up your credit report and get an estimate of your credit score (which you can get for free from CreditKarma.com or Credit.com).
Save for a down paymentIdeally you should save up 20% of the home’s purchase price to use as your down payment. It’s a big number, but putting down this much in cash means you only finance 80% of the purchase. That means you won’t have to deal with private mortgage insurance (PMI) and your monthly payments will be much more affordable.
Coming to the table with more cash also makes you a more appealing borrower for lenders. You’ll likely secure a better interest rate if you reach the 20% down payment threshold.
You’ll also have more flexibility in choosing a mortgage loan type; you won’t be limited to choosing something because you only have a few thousand dollars or require adjustable rates to lower your loan payments in the first few years of ownership.
Again, this down payment may work out to be a large number for you. But you’ll need to do the saving yourself from money you earned. Most lenders do not like to see (and may not accept) borrowed money as a down payment -- even if it was an informal loan from a family member or friend.
Work to improve your credit scoreOnly credit scores in the “good” or “excellent” range will receive the best interest rates available from lenders. The financial institution underwriting the home loan sees you as more of a risk if your credit score is below 720, and they’ll assign a higher interest rate as a result.
Whether or not the system is fair or favors you, you can take action to improve your credit score if it’s less than good or excellent before you apply for a mortgage. This will help you secure a better interest rate -- and that will give you a lower monthly payment and save you money over the lifetime of your loan.
Here’s what you can do to improve your credit score before you go house-hunting:
- Ensure you pay off all your credit card balances on time and in full.
- Don’t run up your credit card balances to their limits. This affects your debt-to-credit-limit ratio and that negatively impacts your score. (Yes, even if you pay those balances off on time and in full.)
You’ll also want to avoid applying for new lines of credit or taking out loans in the months before you apply for a mortgage. Don’t allow anyone to run a hard inquiry on your credit, either.
This won’t automatically disqualify you from approval of a new home loan, but taking out other loans will increase your debt-to-income ratio. That may make it harder to qualify. And you’ll need to explain any recent inquiries that appear on your credit report, which can be a hassle when going through the mortgage process because of the documentation you must provide.
Shop around for more than just one quoteThis is perhaps the most important tip of all. You can save thousands of dollars on a mortgage or refinance just by doing this. Some time ago, The Los Angeles Times reported more than half of all people stop at one lender when they're getting quotes for a mortgage or refi. Bad idea. In one example, the difference between the cheapest loan and the most expensive one for a customer was $75,000 over the life of the loan.
The best way to approach getting a mortgage or refi is to shop with small local banks, credit unions, online lenders, and mortgage brokers. They'll typically give you a rate that's equivalent to a big bank, and they'll offer very large assistance on closing costs that can amount to thousands of dollars