Interest rates on mortgages are expected to rise as the Federal Reserve is on track to tighten monetary policy this year. Yet for now, rates are staying low.
The average rate for a 30-year fixed-rate loan is 3.76%, mortgage-finance giant Freddie Mac said Thursday, down from 3.89% the prior week, with the figures staying near historic lows.
The conflict in Ukraine is one reason rates remain low for the moment, say economists and analysts. Investors tend to gravitate toward what are viewed as safer investments during times of upheaval, such as U.S. Treasury bonds and mortgage-backed securities. Mortgage rates are closely tied to the 10-year Treasury note yield, which fell earlier this week. Cristian deRitis, deputy chief economist at Moody’s Analytics, said prolonged conflict in Ukraine could lead to a short-term decline in mortgage rates.
For buyers wondering about locking in a rate now, mortgage experts say it is a good time to do so. Here are steps they recommend for landing the lowest mortgage rate if you are in the market for a home this year.
Polish That Credit Score
Pull copies of each of your credit reports from the large credit-reporting firms: Experian,Equifax and TransUnion. Check for errors, and dispute any that appear, said Greg McBride, chief financial analyst at Bankrate. A strong credit score, 740 or higher, will net the best rates, he said.
While you are waiting for approval, try to avoid racking up credit-card bills or opening new lines of credit, Mr. McBride said. He advises holding off on big purchases such as furnishings until after the mortgage closes.
“A change in your credit score, debt ratio or employment status could torpedo your approval,” Mr. McBride said.
Buyers can maximize their credit scores by keeping their credit-card balances under 10% of their credit line. Make multiple payments a month, including right before the end of the billing cycle, to keep your credit-utilization ratio low.
Pay for Points
Lenders often let borrowers buy discount points to lower the interest rate on their mortgages. Discount points, upfront payments of 1% of the loan amount, add costs at closing, but can save money on interest in the long run.
Using discount points can be a good strategy in a rising-rate environment, but buyers need to know if they can afford them, said Robert Heck, vice president of mortgage at online mortgage marketplace Morty.
Buying discount points might also be helpful for those who don’t qualify for the lowest mortgage rate because of lower credit scores, Mr. McBride said. Points often take as many as six years to break even, so you will only come out ahead if you have the loan for at least that long, he said.
Weigh Loan Terms
Don’t lose sight of lender fees as you consider interest rates or monthly payment amounts. Focus on APR—annualized percentage rate—when comparing offers because it incorporates both the interest rate and the fees charged for getting the loan, Mr. McBride said.
If you can afford it, make a 25% mortgage down payment instead of 20%, said Holden Lewis, home and mortgages expert at NerdWallet. With a down payment of 25% or more, lenders give you a break in mortgage fees compared with a loan with a down payment of 20% to 24.99%, he said.
Shop Around
A frequent mistake buyers make is only applying to one lender and taking the first mortgage offer they receive, said Mr. Heck at Morty. There is no limit to how many lenders you can apply to when looking for a mortgage.
While applying for a mortgage might cause a small ding on your credit score, applying to multiple lenders shouldn’t make your score any worse if you are applying within the same time frame, typically a 45-day period, he said.
Consider local credit unions and regional banks, as well as housing-finance startups, said Bobbi Rebell, author of the coming book “Launching Financial Grownups.” Cast a wide net in your search, and do it before you find a home so you don’t feel rushed, she said.
Watch the Rates
The minute your offer is accepted and your funds go into escrow, start monitoring your lender’s daily rates as posted on its website.
Typically, within 30 to 60 days of closing you can lock your rate at any time, Ms. Rebell said. This means if the rate is low one day, you can call the lender and request that rate as the one you are charged for the term of the loan. Don’t depend on your lender to let you know when is a good time to lock your rate.
Make sure your lender doesn’t charge you extra to lock in, Ms. Rebell said. If you are buying new construction and delays occur, be clear on who is responsible for any fees to extend the rate lock, if necessary.
Via: Veronica Dagher, The Wall Street Journal
