Whether you’re a first-time homebuyer, shopping for a new house, or refinancing, now is one of the best times to be shopping for a mortgage. The Fed (US Federal Reserve) had been raising interest rates in 2019 as a first sign that we might be coming out of the recession following the 2008 financial crisis.
Then, the Covid-19 pandemic happened in 2020, forcing millions to stay home and halting the plans for economic recovery. Within days of the stock market plunging into a bear market, the Fed acted quickly to pull interest rates to near zero in an effort to keep money flowing in the system.
Ever since then, the interest rates have maintained near-zero status, and mortgage interest rates continue to creep down to the lowest levels ever recorded. The most recent average 30-year fixed mortgage was 2.72% according to Freddie Mac.
There are many types of mortgages you can choose from. Regarding the rate structure, you can have either a fixed-rate or an adjustable-rate mortgage.
The one you want to aim for is the fixed-rate mortgage in today’s low-interest market. This will lock you into the rate you get for the entirety of the loan.
The adjustable-rate mortgage is also available, though it is generally not recommended in a low interest rate environment. The interest rate can change after an introductory period (sometimes 3, 5, 7, or 10 years). After this time, the rate will change based on the market.
One of the first things a mortgage direct lender will check when you apply for a mortgage is your credit score. If you get a high initial quote for an interest rate, it could be due to a lower credit score.
In order to raise your credit score, it’s important to have a history of paying of your credit on time. If you had huge loans and paid them off early, you may have missed out by reducing your credit history.
You may also want to consider paying off any balances you have to reduce your “credit utilization ratio,” or the percentage of your total credit limit you’re using.
Discount points are usually offered by lenders as a way for borrowers to buy down their interest rate. One point is usually equal to 1% of the loan amount. As an example, if you’re buying a $300,000 house, one discount point will cost $3,000, and it will lower your interest rate by about one quarter of a percentage point.
Some mortgage shoppers may think it could be bad for your credit score if you request quotes for several different rates within a short timeframe. However, it is a little-known fact that FICO, the credit score generally used by mortgage lenders, allows a “rate shopping window” where mortgage shoppers can have several credit inquiries requested within a 30-day period.
This means that you can and in fact should shop several different mortgage lenders to compare their quotes.
When you are going through the process of securing a mortgage, one of the factors used to assess the risk of the loan is your down payment. If your down payment is 5%, the bank may calculate a higher risk on the loan which raises the interest rate. If you are able to pay 20% of the sale price, this not only lowers the amount of the loan but also, potentially, your interest rate.
Interest rates are certainly the lowest in history. However, you may not be able to qualify for the lowest possible rates unless you do a bit of pre-planning. These steps will help put you ahead in the eyes of the banks so you can secure a lower interest rate and save thousands.