For the first time since the end of 2015, the 30-year fixed rate mortgage average, provided by Federal Reserve Bank of St. Louis, crossed the 4% mark at the beginning of December 2016. It was well below the 4% mark for most of 2016.
The translation is that it is becoming more expensive to get a mortgage, even though the current rates are still low, relative to historical rates. And as the economy continue to expand, the Fed is likely to raise benchmark rates, meaning that interest rates on mortgages are bound to go up as well. As such, it’s become more important to be diligent while seeking a mortgage deal.
That’s because, a percentage point difference in interest rate makes a lot of difference, regardless of how little it looks on paper. With a down payment of $20,000 for a $200,000 home, you’d be paying $859.35 monthly on a 4% 30-year mortgage. However, a 5% mortgage, with the same parameters as in the former, would see you pay $966.28 monthly. That works out to be an extra $1283.16 payment per year. That amount could be more productive if ploughed into an investment portfolio.
To that end, here are three tips for finding the best mortgage deal.
Improve Your Credit Worthiness
Forget anything you’ve been told about how your credit score shouldn’t judge your ability to secure borrowed funds. The old school truth remains that, the higher your credit score, the higher your chances of getting a mortgage, and at a competitive rate. The rate calculator provided by myFICO sheds more light into how much difference a good credit score could make.
For a 30-year fixed rate mortgage in Iowa, a credit score of 760 and above could help you secure a $200,000 mortgage at annual percentage rate (APR) of 3.815%, paying $934 monthly. A score between 700 and 759 could offer 4.038% APR, paying $959 monthly. A score between 680 and 699 could allow you find a mortgage with 4.216% APR, paying $980 monthly. A score between 660 and 679 could get you a mortgage with APR of 4.43%, paying 1,005 monthly. Obviously, the lower the score, the more expensive a mortgage becomes.
Experts advice that people looking to get a mortgage should start working on their credit score about a year before buying a home. During this time, you should carefully study your report and be sure that every information on it is correct and up-to-date. You should also seek the advice of an expert on how you can improve your score.
Save Up As Much As You Can In Down Payment
There are two main advantages to having the recommended 20% of home price in down payment. First, it can help you nip a more attractive rate. Second, it could take the cost of mortgage insurance off your neck.
Using the Bank of America mortgage calculator, a 20% down payment for a $200,000 home in Iowa City, could see you pay $764 monthly for a 30-year fixed mortgage. The APR works out to be about $4.141%. However, with a 10% down payment on the same type of mortgage, the monthly payment goes up to $859. The APR in this case is 4.335%. Note that the calculator assumes that the borrower has an “excellent credit.” In addition, the point here is to show that with higher down payment, you can secure better terms. The figures here might not necessarily be what you’d get eventually. They’re only estimates.
Research Your Mortgage Options
The excitement of potentially moving to a new home is likely to make you go for the first mortgage option you find. You have to bear in mind that this is a financial decision and as such, you shouldn’t rush it. It would help to make a list of the lenders you have at your disposal, including details about their offerings. You should apply to as many of them as possible.
You should also consider getting on the phone with the lenders, or even visit them to negotiate as much as you can. Let them know of any other offer you have on ground that’s better than what they’re offering. Always bear in mind that lenders are in business and would always want to win over their competitors. This makes this point even more important.
I like the recommendation to save as much as you can for your down payment. It makes sense that this could be helpful because it would allow for a smaller loan which could get a lower interest rate. It’s something I’ll have to remember when looking to buy a house because I think that if I wait and save a little more I’d be much happier.