I always tell clients that any rate is attainable, it’s simply a question of cost and qualification. Given these two factors, there are a few ways in which a buyer can strategically obtain a big break in interest, which can pay HUGE dividends in the long run.
How long your interest rate is locked for during the loan process will have an impact on the actual interest rate itself. For example, closing your loan in 15 days instead of 60 can cut your interest rate by about 0.125 percent. That could save you $20 per month on a $350,000 loan. So how can that be done? I put all prospective buyers through a more rigorous pre-qualification that is referred to as a pre-underwrite. By supplying all the information and documentation to my team upfront, we will actually take you through more of the loan process than a general pre-qualification (which is ultimately worth nothing more than the paper it is presented on). This results in nearly 2/3 of the entire process having been completed before you are even in escrow, which mean less back-and-forth between you, your loan officer and your underwriter, thus getting you to the finish line faster. And the faster the contract period, the faster you close, and the shorter the lock period.
A BETTER LOAN PRODUCT
Another and most common way you can lower your rate is by reducing the length of your loan’s fixed period. A report recently released by the National Association of Realtors (NAR) indicates that most people don’t need 30-year fixed-rate home loan, because they don’t keep their loan that long. Yes, you may keep the property for 30 years (still rare, but could happen), but no one keeps their mortgage for 30 years. The NAR says, “Typically, the older the home seller, the longer the tenure in their home has been—this is a factor in fewer sellers who had to stall the sale of their home. Gen Y typically owned their home for five years while Older Boomers and the Silent Generation owned their homes for 13 years before selling.” If you’re a younger buyer, why pay an approximately one percent higher interest rate, to fix a loan you’re unlike to even need after five years.
There’s a better product for you. It’s called a hybrid ARM. This loan combines the characteristics of an adjustable rate mortgage with those of a fixed-rate home loan. You can choose an interest rate and term to suit your future plans. The start rate can be fixed for three, five, seven or ten years. In exchange for a shorter fixed term, the interest rates can be as low as 1 full percent off that standard 30 YR FIXED rate. Definitely worth a look and I have been locking more buyers into 7 or 10 YR ARM’s over the last 12 months. The rates are attractively lower, and the fixed period of 7 or 10 years provides plenty of peace of mind in knowing that you have no payment adjustments over the near term. And with no penalties attached, you can always refinance or restructure these loans at any time you choose.
BOOST YOUR FICO SCORE
Mortgage pricing for most products is done in credit score tiers. For example, there’s a rate for applicants with FICO scores between 620 and 639, a better rate for those in the 639 to 660 range, and so on. Depending on your current score, adding between one and 19 points can move you into a better group, deserving a better interest rate. Our processing team can counsel you on a strategy to get this quick bump in rate, often times with something as simple as paying down one credit card by a marginal amount. Credit scores are tricky, but there are certainly ways in which to manipulate them.
Moving up a tier, in many cases, saves borrowers about 0.5 percent in loan fees. That’s enough to knock about .125 percent off your mortgage rate. Moving up two tiers (20 to 39 points to your FICO), should drop your rate by about .25 percent. This is certainly a common and quick way to get a better interest rate during the loan qualification process.
BUY DOWN YOUR RATE
An immediate and sure way to get a lower interest rate is to pay discount points. “Discount points” are optional fees the borrowers can choose to pay if they want a lower interest rate and payment. Paying discount points only makes sense if you intend to keep your property for some time and there are also some major tax advantages to doing so.
One creative and great way to get this done is if you can get your seller to cover them when you negotiate your property purchase. Taking $5,000 off the property price may not do much to the big picture, but using $5,000 to get yourself a lower rate might do more to make your house more affordable. The long term savings in interest could and likely will far exceed $5000, as well, so you will come out ahead big time here.
Ultimately, the longer you plan to keep your home and your loan, the more sense it makes to buy your mortgage rate down at the outset. If you plan to keep your property only a few years, or if you don’t know what your plans are, you’re probably better off with a loan with fewer out of pocket costs. Email Me or Call Me today to talk strategy.