How to shop for a low mortgage rate

Good news, house hunters: real estate prices have started to cool down. Prices are still rising, but annual home price growth slowed from April through June, with June marking the sharpest one-month slowdown in home price growth on record, according to Black Knight, a mortgage data analyst firm.

The bad news: Rising mortgage rates are making home ownership less accessible for some buyers.

Although mortgage rates have been on the move this year, the 30-year fixed rate moving average rose to 5.3% at the end of July from 3.2% in January, according to Freddie Mac. As a result, the national median mortgage payments hit $1,893 in June, up from $509 since the beginning of the year, the Mortgage Bankers Association says.

Inflation, geopolitical tensions and recession fears are fueling higher mortgage rates, says Odeta Kushi, deputy chief economist at First American Financial Corp., a provider of title, settlement and risk solutions based in Santa Ana, Calif. to reduce the balance sheet and raise the benchmark interest rate to to tame inflation,” she says. “That has led to higher yields on 10-year government bonds, which has led to higher mortgage rates.”

These rising mortgage rates are forcing some buyers out of the market and causing others to back out of business — about 60,000 home purchase deals across the country fell through in June, according to data from Redfin. The brokerage firm also released a study in June that found that a home buyer with a $2,500 monthly housing budget had lost nearly $120,000 in home buying power since the end of 2022.

First-time homebuyers are bearing the brunt of rising mortgage rates, says Kushi: “It’s becoming very difficult for first-time homebuyers to enter the market, primarily because they don’t have money that existing homeowners are getting from the sale of their current home to buy their next one.” to finance the purchase of a house.”

Ralph DiBugnara, a senior vice president at Cardinal Financial, a national mortgage lender headquartered in Scottsdale, Arizona, agrees it’s a challenging market for first-time buyers. “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 co-signers, and I’m seeing a lot of buyers lowering their price range.”

There are also many buyers who are re-evaluating whether now is the right time to buy a home. “Many buyers have been sidelined and waiting because mortgage rates are rising,” said Bill Gassett, a real estate agent at Re/Max in Hopkinton, Mass.

How to snag a low rate

Would you like to buy a house in this market? Take these steps to qualify for the best mortgage rates.

Increase your deposit. To qualify for the lowest interest rates on a traditional loan backed by Fannie Mae or Freddie Mac — the country’s two largest mortgage buyers — you need a 20% down payment, says Melissa Cohn, a regional vice president at William Raveis Mortgage , a citizen lender headquartered in Shelton, Connecticut. “The bigger your down payment, the better the interest rate,” says Cohn.

Need a little help putting together a larger deposit? DiBugnara recommends looking into national and local down payment support programs. Visit DownPaymentResource.com to research the eligibility requirements for thousands of down payment assistance programs.

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 compliant loan, says John Ulzheimer, credit expert and author of The smart consumer’s guide to good credit. A compliant loan is a loan that follows Fannie Mae and Freddie Mac guidelines; Currently, the credit limit is $647,200 in most areas of the country.

You may be able to get a free credit score through your bank or credit card issuer, or through a site like Credit Sesame or Credit Karma — or you can use MyFICO’s credit scoring tool. If your credit score needs improvement, there are steps you can take to improve it quickly. However, your best strategy depends on why your score is lagging behind.

“Patting off some of your credit card debt can result in a higher FICO score in as little as two weeks,” Ulzheimer says, pointing out that your credit utilization ratio — the amount you owe on your credit cards divided by your card limits — makes up 30% of your FICO scores off. A good rule of thumb: keep your credit utilization 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 in your report actually belongs to you,” says Ulzheimer. “Someone could have opened a credit card in your name and incurred 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 big three credit bureaus – at. If you spot an error, notify each agency immediately.

Shopping spree. Almost half of consumers only receive a single offer when applying for a mortgage, reports the Consumer Financial Protection Bureau. But you’re more likely to find a lower price if you shop around.

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

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

Consider an adjustable rate mortgage. ARMs — short for adjustable-rate mortgages — got a bad rap after the housing market collapsed in 2008 because so many underqualified borrowers couldn’t keep up with their ARM payment increases. But today’s ARMs have more protection than pre-2008 ARMs and may be a good option for some buyers.

An adjustable rate mortgage starts with a lower interest rate than a fixed rate mortgage. Then, after a certain period of time — usually three, five, seven, or 10 years — the interest rate adjusts based on market indices, although there are caps on how high interest rates on ARMs can be. At the end of July, the average introductory rate on 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, a five-year ARM could save you thousands of dollars in interest.

According to a Redfin report released in May, the typical homebuyer would save an average of $15,582 over five years — or about $260 per month — by taking out a five-year ARM mortgage instead of a 30-year fixed-rate mortgage. According to the Mortgage Bankers Association, ARM applications accounted for 10% of all mortgage applications in the week ended May 20, the highest proportion since 2008.

Get the best price

Qualified for a great interest rate? A mortgage rate lock allows you to lock it in for a set period of time — typically 30, 45, or 60 days — from the time you receive a conditional loan offer from a lender until you complete a home purchase.

Many lenders offer a free 60-day rate lock, but you usually have to request it, says Jacob Channel, senior economist at LendingTree. And there are a few caveats. “If there is a change in your financial status, such as B. Your income or credit score before you close a home, your rate can still change,” says Channel. “A lender may also change the terms of your loan if they determine that you have failed to disclose something, such as E.g. additional debt.”

In today’s market, with mortgage rates fluctuating week-to-week, Channel is proposing that buyers receive a ‘float down’ rate lock. With this type of lock, you may be able to get a lower interest rate than you originally set if interest rates fall, he says. Lenders often charge a fee of 0.5% to 1% of the total mortgage amount for a float-down lock.

Remember that the future is uncertain. “Nobody — not even financial experts or your lender — knows where interest rates will end up in 30 to 60 days,” says Channel. “As a result, there’s always some risk of getting a rate lock.” But, he says, a rate lock can also pay off, especially in an environment where interest rates are rising rapidly.