Mortgage interest rates are always a hot topic. How do I get the best rate available? Why do I see and hear such low rates advertised on all media platforms? Borrowers need to remember that a mortgage interest rate should reflect their financial wants and needs. Rates are not something to strive for as bragging fodder at a cocktail party. It is not about keeping up with your neighbor. A mortgage is a very important financial tool and should be treated as one. This article will give you the advice you need in order to achieve the best rate and situation for you.
- know your financial situation
- know your credit score
- know what affects your credit score
- shop around
- be lazy
- fall for gimmicks
- give up
There are too many people out there that bury their heads in the sand and only pay attention to their day to day financial needs. Take the big picture approach. How much do I spend? How much do I save? Have I put together a “pretty” picture for whichever lender I choose to use for my new mortgage? Remember that your financial picture will be the first impression you make while shopping for a mortgage rate.
When discussing mortgage interest rates, there is no bigger factor than your credit score. A majority of mortgages originated in the US are sold to either Fannie Mae or Freddie Mac. Both Fannie and Freddie tier their mortgage rates around a borrower’s credit score. That means the higher your credit score, the better your rate. Vice versa is true as well. There are three major credit reporting bureaus in the mortgage industry: Equifax, Transunion and Experian. Scores can vary widely between the bureaus. Rates are determined by your middle credit score, meaning your highest and lowest credit score do not factor into rate determination.
There are three major factors that help to determine your credit score. The first and most important is making your credit payments on time. Credit scores can be destroyed by simply being 30 days late on a monthly payment. You can have an absolute perfect credit history, but one late payment can bring your score down and affect your mortgage rate. Secondly, your debt level is a big factor. You need to be aware of your high credit limit on each of your credit accounts especially your credit cards. The magic number is 30 percent. That means you should never have a balance higher than 30 percent of your credit limit. The higher the percentage of debt versus credit limit, the lower your score goes. The last major factor that affects your credit score is your credit history and depth of credit. This does not mean go out and open as many new credit accounts as you can prior to shopping for a mortgage. It does mean that you should not close any accounts that are already opened and established. The more credit you have, the length of time you have had the account, and having various types of credit will do wonders for a credit score.
In today’s financial world, there are many outlets for the mortgage shopper. You have the big banks, direct lenders, and mortgage brokers. Each have their pros and cons. Keep in mind while shopping for rate quotes that you need a closing cost estimate as well. Some quoted rates could carry discount points and/or origination fees; these are fees built into your closing costs that can lower a rate. Just because the rate may be better than other quotes you received, it does not mean you are getting the best deal. When receiving an estimate, the APR% should be included. The APR% is a function of the rate and closing costs combined. Disclosure of the APR% can be used as a shopping tool. You can quickly look at the APR% to determine where you are getting the best overall deal.
There is a ton of competition in the mortgage industry. You need to take advantage of that. Consider it a buyer’s market when you are shopping for your mortgage and rate. You are the consumer and you should be treated as such. Never feel as if you are lucky to get a mortgage. You need to understand that the mortgage professional getting your business is the lucky one in the transaction. Be prepared for any questions about your financial situation, shop around and be excited about obtaining an interest rate that your parents could only have dreamed about.
Rates have been going up and look as if they will continue to do so. Everyone has been conditioned to believe that the low rates we have been seeing are now the norm. That is not the case. The government has been keeping the rates artificially low with programs such as Quantitative Easing (QE). With the threat of QE winding down, we are seeing rates rise. Ask your parents the interest rate they paid on their first house. That will give an idea of how low rates really are.
Just because mortgage companies advertise crazy low rates, it does not mean that those rates are still valid. There are Federal and State regulations that require advertisements of mortgage rates and programs. That does not mean that everything you read, see, or hear is up to date or does not have some sort of bait-and-switch involved. The mortgage industry like many others have people that skirt the rules. Make sure every quote you receive comes with a good faith estimate and the APR%.
Just because rates are rising, it does not mean you should not be looking at a home purchase. It may mean that you have to lower your loan amount to meet your monthly payment goals. There is a difference between what you can qualify for and what you want your monthly living expense to be. Work backwards if you need to. Decide what you want your monthly payment to be and ask your mortgage professional for a price range you should be looking in. The house may not be the home you dreamed of when you were younger, but sticking to a budget can help all of your other dreams come true.
Shopping for a mortgage and mortgage rate can be a daunting process. Remember that buying a home and getting a mortgage is the biggest financial decision and investment that most of us will make in our lifetime. Treat it as such. That being said, buying a home and getting a mortgage can also be the most exciting and rewarding endeavor we take. Follow the simple advice described above and you will be in position to get the best interest rate available when you begin your hunt.