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How to find a low mortgage rate

Good news, home seekers: Home prices have started to cool off. Prices continue to rise, but annual home price appreciation slowed from April to June, with June marking the sharpest single-month slowdown in home price growth, according to Black Knight, an investment research firm. mortgage data.

The bad news: Rising mortgage rates are making homeownership less affordable for some buyers.

Although mortgage rates have been in a state of flux this year, the 30-year fixed-rate average soared from 3.2% in January to 5.3% at the end of July, according to Freddie Mac. Consequently, the payment The national average mortgage loan came in at $1,893 in June, an increase of $509 from the beginning of the year, says the Mortgage Bankers Association.

Inflation, geopolitical tensions and recession fears are driving higher mortgage rates, says Odeta Kushi, deputy chief economist at First American Financial Corp., a Santa Ana, Calif.-based provider of title, settlement and risk solutions. . “The Federal Reserve has been reducing its balance sheet and raising its benchmark rate in an effort to control inflation,” he says. “That has resulted in higher 10-year Treasury yields, which has resulted in higher mortgage rates.”

Those rising mortgage rates are pushing some buyers out of the market and causing others to back out of deals: About 60,000 home-buying deals across the country fell through in June, according to Redfin data. The brokerage also released a study in June that found a homebuyer with a $2,500 monthly housing budget had lost almost $120,000 in home buying power since the end of 2022.

First-time homebuyers bear the brunt of rising mortgage rates, says Kushi: “It’s becoming very difficult for first-time homebuyers to get into the market, largely because they don’t have the money to buy them.” existing homeowners get from the sale of their current home. home to finance the purchase of your next home.

Ralph DiBugnara, senior vice president at Cardinal Financial, a national mortgage lender based in Scottsdale, Arizona, agrees that it’s a challenging market for first-time homebuyers. “I see some buyers pulling out of the market because they can no longer afford a home loan,” he says. “I’m also seeing an increase in the number of people getting cosigners, and I’m seeing a lot of buyers narrowing down their price range.”

There are also a lot of buyers who are re-evaluating whether now is the right time to buy a home. “Many buyers have been left on the sidelines and are taking a wait-and-see approach due to mortgage rate increases,” says Bill Gassett, a real estate agent with Re/Max in Hopkinton, Massachusetts.

How to get a low rate

Are you looking to buy a home in this market? Follow these steps to qualify for the best mortgage rates.

Increase your down payment. To qualify for the lowest rates on a conventional loan backed by Fannie Mae or Freddie Mac, the nation’s two largest mortgage buyers, you’ll need a 20% down payment, says Melissa Cohn, regional vice president at William Raveis Mortgage, a company national. Shelton, Conn.-based lender. “The higher your down payment, the better the rate,” says Cohn.

Need a little help putting together a bigger down payment? DiBugnara recommends looking into national and local down payment assistance programs. You can research the eligibility requirements for thousands of down payment assistance programs at DownPaymentResource.com.

Increase your credit score. In general, consumers need a FICO score of 760 or higher to be eligible for the lowest mortgage rates on a conforming loan, says John Ulzheimer, a credit expert and author of The smart consumer’s guide to good credit. A conforming loan is a loan that follows the guidelines set forth by Fannie Mae and Freddie Mac; Currently, the conforming loan limit in most areas of the country is $647,200.

You may be able to get a free credit score estimate through your bank or credit card issuer, or from a website like Credit Sesame or Credit Karma, or use MyFICO’s credit score estimator tool. If your credit score needs a boost, there are steps you can take to give it a quick boost. However, your best strategy will depend on why your score is lagging.

“Paying off some of your credit card debt can lead to a higher FICO score in as little as two weeks,” Ulzheimer says, noting that your credit utilization ratio — the amount you owe on your credit cards, divided by your card limits, makes up 30% of your FICO score. A good rule of thumb: keep your credit utilization ratio below 30%.

It’s also a good idea to check your credit reports for errors. With identity theft at an all-time high, “make sure all the information on your report really belongs to you,” says Ulzheimer. “Someone could have opened a credit card in his name and racked up a significant amount of debt.”

Through the end of this year, you can get a free weekly credit report from Equifax, Experian and TransUnion, the three major credit reporting agencies, at . If you spot an error, notify each agency immediately.

Shopping around. Nearly half of consumers get a single quote when they apply for a mortgage, reports the Consumer Financial Protection Bureau. But you’re more likely to find a lower rate if you shop around.

According to a 2018 study by Freddie Mac, borrowers who got two rate quotes saved an average of $1,500 over the life of their mortgage, and those who got five quotes saved an average of about $3,000.

Get quotes from at least three lenders. (Local lenders and credit unions tend to offer lower mortgage rates than big banks. You can also shop at online lenders like Rocket Mortgage.) Because underwriting requirements can vary, “you may get a different quote from each lender you talk to.” Kushi says.

Consider an adjustable rate mortgage. ARMs, short for adjustable-rate mortgages, developed a bad reputation after the housing market crashed in 2008 because many unqualified borrowers couldn’t keep up with increases in their ARM payments. But current ARMs have more built-in protections than pre-2008 ARMs and may be a good choice for some buyers.

An adjustable-rate mortgage starts with a lower interest rate than you would get with a fixed-rate mortgage. Then, after a specified period of time—usually three, five, seven, or 10 years—the rate adjusts based on market indices, though there are limits on how high ARM interest rates can be. At the end of July, the average introductory rate for a five-year ARM was 4.31%, compared to an average of 5.54% for a 30-year fixed-rate mortgage.

“I like adjustable-rate mortgages when borrowers understand them,” says DiBugnara. “If you have an exit strategy, an ARM can be a great product.” For example, if you know you’ll be selling your home in the next four years, getting a five-year ARM can save you thousands of dollars in interest.

According to a Redfin report published in May, the typical home buyer would save an average of $15,582 over five years, or about $260 per month, by getting a five-year ARM instead of a 30-year fixed-rate mortgage. . According to the Mortgage Bankers Association, ARM applications represented 10% of all mortgage applications in the week ending May 20, the highest proportion since 2008.

Secure the best rate

Qualified for a great interest rate? A mortgage rate lock allows you to lock it in for a set period, usually 30, 45 or 60 days, from the time you receive a conditional loan offer from a lender to the time you close on a home.

Many lenders offer a free 60-day rate lock, but you usually have to apply for it, says Jacob Channel, senior economist at LendingTree. And there are a couple of caveats. “If something about your financial status, like your income or credit score, changes before you close on a house, your rate can still change,” says Channel. “A lender can also change the terms of your loan if he discovers that he has not disclosed something, such as additional debts.”

In today’s market, with mortgage rates fluctuating from week to week, Channel suggests buyers get a “floating down” rate lock. With this type of lock, you can potentially get a lower rate than you initially locked in if interest rates drop, he says. Lenders often charge a fee of 0.5% to 1% of the total mortgage amount for a floating lock.

Keep in mind that the future is uncertain. “No one, not even financial experts or your lender, knows where rates will end up 30 to 60 days from now,” says Channel. “As a result, there will always be some risk in getting a rate lock.” But, she says, a rate lock can also pay for itself, especially in an environment where rates are rising rapidly.

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