Locking In a Low Mortgage Interest Rate
Locking In a Low Mortgage Interest Rate
By: Stacey Nickens
Mortgage interest rates have remained low for the past few years, benefitting homebuyers looking for affordable monthly payments. However, the Fed raised the benchmark federal funds rate at the end of their March meeting, and this decision will likely raise mortgage rates.
As of the week of March 17, the average rate for a 30-year fixed mortgage was 4.16%, according to Freddie Mac. After falling since the end of 2019, the average 30-year fixed mortgage rate has begun to rise again. In this rising interest rate environment, homebuyers should still make sure to follow these steps in order to lock in the lowest possible mortgage rate.
Improve your credit score. Download copies of your credit reports from Experian, Equifax, and TransUnion. Check for errors on your report, and dispute any that you find.
You can also regularly track your credit score through American Express, Mint.com, and other online tools. A credit score of 740 or higher will secure you the best rates. You can maintain or lower your credit score by keeping your credit-card balances below 10% of their credit line. You can also make multiple payments a month to improve your credit score. You should especially consider making payments right before the end of the billing cycle to lower your credit-utilization ratio.
As you get closer to applying for a mortgage, reduce your credit-card spending and avoid opening new lines of credit.
Pay for points to reduce your rate. Discount points are upfront payments of 1% of the loan amount. Points increase your closing costs but decrease your interest payments. Discount points may make sense for you if you have strong savings but a lower credit score. Points could mitigate the interest rate impact of your lower credit score.
Before paying for points, make sure you can afford to do so. You should also consider how long you plan to live in the house. It usually takes around 6 years for the cost of the points to break even with your interest rate savings. If you plan to move out of the house before then, the upfront expense may not make sense for you.
Review your loan terms, and shop around. You can apply to multiple lenders and compare their offers. Applying for a mortgage may slightly reduce your credit score, but if you apply with multiple lenders within the same 45-day time period, the credit monitoring companies will lump these credit pulls together into a single pull.
You can look at offers through credit unions, regional banks, and even housing-finance startups. As you consider the different offers, focus on your annualized percentage rate or APR. The APR includes both your interest rate and any loan fees, allowing you to account for different lenders’ fees.
Pay attention to daily rates. After closing, you have between 30-60 days to lock in your mortgage rate. Review your lender’s daily rates during this time period instead of depending on your lender to pick the best rate for you. When you see their rates are lower, you can call your lender and request to lock in that rate for your loan.
Before doing so, you should make sure your lender does not charge any fees for you to lock in your rate.
Need additional assistance? Elm3 offers comprehensive financial planning services that can assist you in saving for and buying a home as well as managing mortgage debt. Contact us today to set up your initial consultation.
