Tracking mortgage rates can be a headache. But for the 87 percent of homebuyers who finance, keeping an eye on home loan rates could be enough to lower your monthly payment.* There are also six ways to help decrease your rate, no matter what the market’s doing.
Save money with 6 rate-dropping strategies
Mortgage rates hit historic lows in 2020, related to economic changes caused by our global health crisis. Housing authorities like Fannie Mae and the Mortgage Bankers Association (MBA) expect rates to stay the same or rise slightly in 2021. This uptick in affordability, made possible by rates hovering around record lows, is the reason more homebuyers have decided to purchase.
You can use six tips to help lower your mortgage rate and make homebuying even cheaper:
1. Get a rate quote.
Comparing mortgage rates is a must:
- As a 2020 Haus study showed, lender and location matter.
- Shopping around could save you thousands of dollars and count for more than your credit score or down payment.
- Haus found that, even with the same financial profiles, a buyer with a lower rate could save over $75,000 over the life of their mortgage. (Note that individual factors will vary.)
When you do shop around, don’t rely on sites that spit out boilerplate quotes. Connect with a local lender who can provide an individualized rate quote instead. This quote should include numbers that reflect your personal financing needs and a lender’s specific loan fees so you know exactly what you’re getting into.
Remember, a rate quote is based on your unique profile and financial situation. Rates reported in the media are just source material. Those rates may also expire by the time you read them.
Always insist on getting a full written term sheet that shows the interest rate, loan term, total monthly payment (including insurance and taxes), total cash-to-close, and line item list of closing costs before you lock your rate with a lender.
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2. Improve your credit score.
myFICO has a handy little tool that can tell you how much your credit score could earn you in a mortgage rate. These numbers are set at the national average, with plenty of variables that can change based on location, personal finances, loan type, down payment, and more.
But, a healthy credit score might nab you a mortgage rate that’s over 1.5 percent lower, potentially saving you $261 a month on your mortgage.
Many loans have flexible credit requirements and are friendly to first-time buyers, but putting the extra effort into cleaning up your credit may save you $3,132 a year. The Haus study also noted that you’re likely to see the biggest savings when you move from the Bad/Fair (below 650) to the Good (700 to 749) credit score range.
3. Increase your down payment.
There’s no longer a hard-and-fast rule that says you have to put 20 percent down. The 2020 Downpayment Expectations & Hurdles to Homeownership report from the National Association of REALTORS® confirmed the median down payment amount for all buyers to be 12 percent. This dropped to just 6 percent for first-time buyers.
- If you have the funds, consider using them.
- A larger down payment can lower the mortgage rate you qualify for.
- A higher down payment comes with a lower loan-to-value (LTV) ratio that decreases your risk to a lender. And, a lower LTV may come with a lower rate.
To give an example: A first-time buyer purchasing a median-priced home at $310,600 doesn’t necessarily have to pay $62,600 down, or 20 percent; a 6 percent down payment adds up to $18,636.**
4. Decrease your DTI (Debt-to-Income Ratio).
Your DTI, or Debt-to-Income Ratio, is how much monthly income you pay toward debt, calculated as a percentage. This number also includes your estimated monthly mortgage payment for the future.
Too much debt, as you may gather, increases your risk to a lender. A favorable DTI sits below 36 percent, though Fannie Mae and Freddie Mac have increased their debt-to-income limits from 45 to 50 percent to make borrowing easier. A DTI below 30 percent and LTV below 80 percent could further decrease your rate, according to the Haus study.
Increasing income, paying down debt, and postponing large purchases are all ways to keep your DTI on the low end and potentially reduce your mortgage rate.
5. Use a rate lock.
Another way to leverage a lower rate? Get a guaranteed rate lock:
- Consider locking your mortgage rate for up to 270 days if you’re buying a new build or moving from one home to the next.
- If the Federal Reserve raises its benchmark rate from near zero this year, as some economists have predicted, this will impact mortgage rates indirectly.
- With the potential for mortgage rates to increase, even slightly, in the months ahead, locking a low rate now can be a smart move.
For instance, you might save $67 a month by locking in a $250,000 loan with a $1,033 monthly payment at a 30-year fixed rate of 2.84 percent/3.02 Annual Percentage Rate and with an estimated $15,000 down payment. Compare this to the same loan scenario with a 3.53 Annual Percentage Rate, a $1,100 monthly payment, and just a half-point projected interest rate increase.***
6. Don’t wait.
Today’s historically low mortgage rates are still great news for buyers. They’re sitting at around 2.73 percent, a far cry from the peaks of over 18 percent seen in the 1980s.
Just a year ago, right before the pandemic, rates were at 3.72 percent. The MBA predicts that rates may reach an average of 3.3 percent this year and 3.6 percent in 2022. Purchasing when rates are rock-bottom, as we’re seeing now, may make your monthly mortgage payment that much cheaper.
The lower the rate, the more house you can buy
Using any of these tips to lock in a low rate could move you up to a higher price range. With a lower rate comes more buying power, so you might be able to purchase more than you first thought — without having to change your housing budget. Find out how much house you can afford at today’s low rate when you prequalify.
*”Highlights From the Profile of Home Buyers and Sellers.” NATIONAL ASSOCIATION OF REALTORS®, 2020.
**30-year fixed rate of 2.84 percent/3.02 Annual Percentage Rate (as of 11/2020); MBS Highway estimate. For illustrative purposes only, based on the average national down payment amount and today’s median home price.
***MBS Highway payment estimate, 2021. Rates listed are for illustrative purposes only.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.