BUYERS & SELLERS

Securing a great mortgage rate

WHETHER YOU ARE A FIRST-TIME BUYER or a seasoned real estate investor, finding the right mortgage is one of the most important tasks for any prospective buyer. Although certain factors are controlled by elements outside a borrower’s influence, different elements within the buyer’s control can have a positive effect on mortgage rates. Mortgage rates are always changing, so a good thing to keep in mind is that, according to the Freddie Mac Primary Mortgage Market Survey, the average rate for 30-year fixed mortgages is 7.81%. Rates for the 2022 year are reported by the Federal Home Loan Mortgage Corp. as 5.30% for 30-year and 4.45% for 15-year fixed-rate mortgages, respectively.

Before looking at ways to secure a great rate, it’s important to understand some loan fundamentals. A mortgage rate is composed of four elements, collectively known by the acronym PITI, which stands for principal, interest, taxes and insurance. The higher the rate, the more interest will be paid to the lender over the life of the loan. Securing a great mortgage rate will require diligence and consistency for most buyers, but it is well worth the payoff in the end.

People interested in purchasing a property should look into the availability of special assistance programs. Here in Southwest Colorado, the HomesFund can provide education for those new to the process and offers financial assistance for securing mortgages. Other options, such as FHA loans for first-time buyers, are also worth investigating.

Next, use a mortgage calculator to estimate what a monthly payment might be when the estimated variables are taken into account. This can provide a starting point and give context to other information you will seek out and actions you can take. Then, take time to examine factors within an individual’s control.

Credit Score is one of the things a lender will review. It is an indicator of financial well-being and capability. If a score is in the high 600s, you can likely qualify for a prime mortgage, although you will also typically need a 10-20% down payment. Advice from a financial planner can help you work your way to a better credit score. Make sure to proof your credit score for errors and get them corrected as well. While potentially time-consuming, this can pay off.

Debt-to-income ratio also affects mortgage rates. Evaluate this carefully and make adjustments where necessary. Some debts, such as student loans, are seen in a favorable light by lenders. Other forms of debt, such as high-interest credit cards, are seen as a liability, and a lending institution may charge a higher rate to offset the perceived risk associated with a high debt-to-income ratio.

Down payments can lower the rate as well. The more you can afford for a down payment, the lower the loan-to-value (LTV). Although this can be beneficial in securing a better rate, remember not to drain cash reserves for a big down payment. Lenders will be more comfortable if a buyer is also able to have financial reserves that can cover a few months of expenses.

Loan terms can vary. There are different lengths of loans, typically 15 and 30-year terms. Doing the math to figure out if you can afford the increased monthly payments associated with a 15-year loan versus a 30-year loan can save a lot of interest down the road and is the recommended route, if feasible.

There are other factors you can take action on that will impact your final mortgage rate, such as choosing fixed-rate versus adjustable-rate mortgages, paying down interest at closing through prepaid mortgage points, and even seeking employment that pays a better wage.

Don’t forget to account for closing costs a lender and third parties may charge. This includes things like the lender’s underwriting fees and title insurance, among others. Although this won’t affect a mortgage rate, it will impact finances, which is always important to keep in mind when budgeting for a home.

Buying a home is one of the most exciting and rewarding adventures in life. In order to secure the most advantageous mortgage rate possible, organizing finances is extremely important. n