Mortgage rates have seen slight increases since the election, but that does not mean prospective homebuyers have lost the opportunity to still lock a great rate for their new home purchase. With the likelihood increasing that the Federal Reserve could boost interest rates later in December and stick with its policy of monetary tightening, at least in the near term, the reality is that mortgage rates could rise even more. This means prospective homebuyers need to be extra diligent in their efforts to secure a low mortgage rate.
According to Bankrate, as of Dec. 4, the average 30-year fixed mortgage was 4.13%. Comparatively, a month before, the 30-year mortgage rate averaged just 3.51%, a difference of 62 basis points. Mortgage rates have reached their peak to date this year in the week leading up to the expected rise in the key interest rate, with the 30-year fixed-rate mortgage averaging 4.13 percent, according to Freddie Mac's recently released Primary Mortgage Market Survey® (PMMS®). The key rate, which the Federal Reserve will determine action on next week, generally informs the movement of mortgage rates. Analysts widely anticipate an increase in the rate, despite initial claims to the contrary after the election.
Before you get started the most important step to take is to consult an experienced licensed loan originator who will be able to educate you on all of the options available the match your financial needs. The average NJ Lenders Corp. loan originator has over 10 years of industry experience. 50% of the company’s Loan Originators close an average of 7.6 loans per month, nearly double the national average. This means that with market knowledge, experience and a reputation the breeds investor confidence- they can easily help you identify ways you can still take advantage of a great rate for your home purchase.
Here are four ways you may be able to snag a low mortgage rate even with interest rates on the rise.
1. Use your credit score as a bargaining tool
One of the smartest things you can do prior to searching for a home is to maintain a good or excellent credit score. Your credit history is closely analyzed by mortgage lenders since a home is arguably the biggest purchase you're ever going to make.
There are five factors that influence your credit score, although the precise formula is a closely guarded secret. According to FICO, your credit score is based on the following factors (along with their importance in parenthesis):
Payment history (35%)
Credit utilization (30%)
Length of credit history (15%)
New credit accounts (10%)
Credit mix (10%)
Or in simpler terms, if you pay your bills on time, don't use more than 30% of your aggregate credit available, keep your good-standing accounts open for a long time, avoid opening too many new accounts, and demonstrate that you can handle installments loans and revolving credit, then you're liable to have a favorable credit score.
If you do have a good credit score (usually 720 and higher), you may be able to use your responsible payment history as a bargaining tool to get a lower mortgage rate. The higher your credit score, the more banks will fight for your business and perhaps undercut their competition.
2. Shorten your loan
Instead of putting more money down on your home purchase, another option to lower your mortgage rate is to shorten the length of your loan from a 30-year traditional mortgage to a 15-year one. Your monthly payments will be higher, but there's also less perceived risk for the lender if you take a shorter-term loan.
According to Bankrate, the average 15-year mortgage rate as of Dec. 4, was 3.39%, providing 74 basis points of savings over the 30-year mortgage. Although your monthly payment would be about $520 higher with a 15-year loan (based on the previous example of a $200,000 home loan) compared to a 30-year home loan, the total cost of your mortgage would be almost $94,000 less!
3. Increase your Down Payment
A pretty simple solution that could help lower your mortgage rate is to consider a larger down payment. The more money you're willing to put down up front, the more comfortable a lender is liable to be when giving you a loan. And the more comfortable you can make a lender, the more likely they are to offer concessions in the form of a lower mortgage rate.
As an added bonus, putting at least 20% down on a home can exempt you from having to pay primary mortgage insurance, or PMI.
4. Consider an FHA loan
Select homebuyers may also benefit from an FHA loan, named after the Federal Housing Administration. FHA loans can sometimes qualify for lower mortgage rates than conventional home loans, and they almost always have lower down-payment requirements. If you qualify for an FHA loan with a credit score of 580 or higher, you may be able to get away with only putting 3.5% down. People with FICO scores ranging from 500 to 579 can qualify for an FHA loan, too, although they'll need to put at least 10% down.