You’ve heard the news – 30-year mortgage rates surged from 3.22% in January of 2022 to 6.94% in the week of October 20, 2022, according to FreddieMac.com.
Will they come down as rapidly as they rose? Will they come down at all in the near future? Those are common questions right now and the answers are merely guesses.
Obviously, money is getting expensive to borrow, yet home prices are coming down. If you play your cards right and shop wisely for a mortgage, you may just find that the lower prices will help counteract the sticker shock of higher interest rates.
There are tried and true tactics to save money on a mortgage and today we bring you five of the most commonly used.
1. Consider scheduling your mortgage applications around the fall/winter holidays
In winter, 2021, Colin Robertson at The Truth About Mortgage undertook an interesting research project. “I set out to see if there were any mortgage rate trends we could glean from available data, using Freddie Mac’s historical mortgage rates that go back to 1971,” he explains.
For the project, he took the monthly average of 30-year, fixed-rate mortgage rates.
Interestingly, he found that, yes, there are certain months of the year when mortgage interest rates are lower than other months. By far, the lowest average rate, 6.04%, was offered in December, while October and November were right behind with an average rate of 6.08%.
The highest rates were offered in April and May (6.31%).
Read more about Robertson’s research at TheTruthAboutMortgage.com.
2. Work on your credit issues before applying for a mortgage
Use the time while you’re waiting for winter to spruce up your credit reports and, thus, scores.
Yup, you’ve probably heard this one before, but that doesn’t make it any less valid. Borrowers with higher credit scores present less of a risk to lenders who then reward them with lower rates on mortgages.
The folks at FICO® have compiled a chart showing the average rate according to FICO score. It shows that borrowers in the lowest score range (620-639) would be offered a mortgage rate of 7.673 % while those in the higher range (760 to 850) might receive a mortgage rate of 6.084 %.
Naturally, the researchers used several assumptions (loan amount, LTV ratio, points purchased, etc.) when compiling the chart and you can find those online at MyFico.com.
3. Shop around and compare rates and fees
You’ve no doubt heard this admonition as well. Again, if you want to save as much as possible on your mortgage, comparison shopping is a must.
But, that’s not all. You can save on your closing costs with comparison shopping as well. Many homebuyers, especially first-timers, are unaware that there “… are a number of closing costs you may be able to negotiate down with your lender, including application fees, fees associated with rate locks or the purchase of points,” suggests Donna Fuscaldo at Investopedia.com.
She goes on to caution borrowers that “… appraisal fees, property taxes and flood certification fees” are non-negotiable.
Start the process by choosing more than two lenders to compare. “Our research indicates that borrowers could save an average of $1,500 over the life of the loan by getting one additional rate quote and an average of about $3,000 for five quotes,” suggests the results of a study by Freddie Mac’s Economic & Housing Research Group.
When comparing offers from lenders, compare the APRs, not the interest rate. The APR (Annual Percentage Rate) includes the various fees the lender charges, such as some closing costs, loan origination fees and others.
When it comes to haggling over negotiable closing costs, start with the origination fee. Fuscaldo suggests that you “… ask your lender if there are any aspects of it that can be waived, such as the application or processing fees.”
Then, plan on shopping for your own title insurance. Yes, the lender may suggest an insurer, but it truly pays to shop around to compare prices.
“In 2021, the Urban Institute examined variability in title costs in several major markets and found great variability in title charges,” Fuscaldo claims.
They found that Sacramento, California homebuyers who shopped around “could save as much as $326 … and as much as $528 in Broward County, Fla.,” she concludes.
Learn more about negotiating with the lender at BankRate.com.
4. Pay now, save later
Points, for those not familiar with the term, “… are essentially a form of prepaid interest you can choose to pay up front in exchange for a lower interest rate and monthly payments (a practice known as “buying down” your interest rate),” according to the pros at USBank.com.
Robertson offers up an example: The borrower is offered a 30-year fixed loan at 5.125% interest. If she pays 1% of the loan amount now, her rate will drop to 4.875% for the life of the loan. This represents significant savings and a lower house payment.
He goes on to caution, however, that if you don’t plan on keeping the home for a significant amount of time, this strategy “… could end up costing you.”
Speak with your accountant or other financial professional for advice.
Consider an adjustable-rate mortgage
Adjustable-rate mortgages (ARM) offer a fixed rate for a specified amount of time. After this, the rate can change. A 5/1 ARM, for instance, gives the borrower a fixed interest rate for 5 years. After that, the rate may be adjusted every year.
Adjustable-rate mortgages earned a horrible reputation during the Great Recession and that reputation lingers until today. “ These loans … were often misused to enable borrowers to obtain mortgages they really couldn’t afford over the long haul,” recalls Aaron Crow at MortgageLoan.com.
Since then, when the fixed period of the ARM expires, “… there are caps that limit how much your rate can increase over time to help ensure you can still afford the loan even if rates in general are rising,” explains Peter Warden, editor at TheMortgageReports.com.
The fixed rate for these loans is typically lower than you’ll find with a 30-year fixed rate. For instance, as of “… Sunday, November 27, 2022, the current average rate for the benchmark 30-year fixed mortgage is 7.32%,” according to the experts at BankRate.com.
The rate for a 5/1 Adjustable-Rate Mortgage? 5.51%.
That’s a whole lot of savings for the borrower.
If you don’t plan on staying in the home long-term, or you are willing to refinance after the fixed period, this might be the ideal loan for you.
To learn more about ARMs, head over to Mortgage Resource Center.
We are not mortgage brokers or financial experts. Before making any decision based on the above information, seek advice from a financial adviser, accountant, attorney, or other applicable professional.
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