Mortgage rates have more than doubled since the pandemic to an average of 7.18 percent, leaving new homeowners with payments that are hundreds of dollars higher than five years ago.
But do not lose hope, say veteran real estate agents and mortgage brokers. Rates are high but a strategic approach to a mortgage application can bring them down significantly.
What’s important is the right tactics combined with the right mentality, said Robert Shamie, CEO of mortgage lender Fidelity Residential.
“Think like a shopper, not an applicant,” Shamie told The Independent in an email.
Many retail shoppers are savvy in comparing prices to save money. That’s exactly what home buyers should do.
Points over down payment
Buying a home typically requires two big financial commitments - a home loan and a down payment. Home loans are paid back over time but a down payment must be provided upfront to a lender.
While it may appear that a large down payment is the priority - as it reduces the amount of the home loan - experts say extra money should go toward “points” instead.
Points refer to home loan interest rates, which are expressed as a percentage. One percentage point of an interest rate is one “point.” In some cases, borrowers can pay money upfront to the lender in exchange for a lower rate. Mortgage and real estate experts call this practice “buying points.” For example, a buyer could pay an extra $15,000 to lower their interest rate by one percentage point.
Buying points can save more on monthly mortgage payments than negotiating a lower purchase price or piling that cash into a down payment to reduce the loan amount, John Gluch, owner of Gluch Group/eXP Realty, told the The Independent.
“Deploying an extra $10,000 toward a down payment on a $500,000 purchase only shaves a fraction off the principal, saving roughly $65 to $70 a month,” Gluch wrote in an email. “Allocating that same $10,000 toward interest rate points… can reduce the monthly payment by $200 or more.”
In some cases, buyers can ask sellers to buy down points for them, Kevin Watson, regional manager at lender Churchill Mortgage, told The Independent in an email. Buyers can ask their agent to include a points buy-down in their purchase contract, which requires the seller to pay for that as part of their closing costs.
“Logic would tell you that a larger down payment would help you get a better rate, but that is not always the case,” Watson said.
Leverage the lenders
The current mortgage market differs from five years ago in several ways, including in something called “spread”.
“Spread” refers to the difference in mortgage rates between lenders. During the pandemic, lenders’ interest rates were virtually identical, meaning the spread was small, said mortgage broker Josh Jankelow, owner of lender Olympus Financial LLC.
Today that spread is much wider, meaning one lender could offer a rate noticeably lower than a competitor.
“Lender pricing is far more spread out than it used to be,” Jankelow said in an email. “The gap between lenders on the same loan more than doubled after 2022. For borrowers who shop, that spread is opportunity.”
How much of an opportunity? Borrowers could save $50-$100 a month on a mortgage payment, Jankelow said. But to find that lower rate, borrowers have to comparison shop, Ryan Meehan, a property tax expert and owner of property tax consultancy TaxDrop.
“Get quotes from multiple lenders, at least three,” Meehan said. “Different lenders’ rates can vary wildly.”
The more financial information provided to lenders, the more accurate borrowers’ rate quotes will be, Meehan said.
“Provide your actual income and financial details for a true quote, so you don't get deep in the process only to end up with a high rate or requirement for a massive down payment late in the process,” he said.
Cunning credit moves
Credit scores play an important role in mortgage rates. The better your score, the lower your rate. Even a two-point difference in scores could cost borrowers for years, Jankelow said.
“Pricing moves in tiers, so a borrower at 738 instead of 740… can pay noticeably more for the exact same loan,” he said. “Most people have no idea how close they are to the next tier.”
Borrowers should work with a lender to create a long-term plan to boost their credit score.
“An experienced loan officer will give you a plan, and I recommend talking to one at least six to 12 months before you plan to buy so you have a longer runway to execute it,” Watson said.
Paying credit card balances down below 30 percent of credit limits can make a big difference, credit bureau Experian says.The ratio of a credit card balance to its limit - known as “utilization ratio” - makes up 20-30 percent of a credit score. Paying down a card balance from a 50 percent ratio to 30 percent can raise a score 20 to 50 points, says lender MoneyLion.
Borrowers have to be strategic about when they pay down their debt, experts say. The sweet spot is three to six months in advance of applying for a mortgage, Gluch said.
“Card issuers update credit bureaus on different 30-day billing cycles, and credit scoring algorithms need a reporting cycle to reflect the change,” he said.
Never pay down thousands of dollars of debt within 60 days of applying for a mortgage, Gluch added, as lenders may see it as suspicious behavior. Lenders’ risk assessors, called underwriters, may see it as a last-ditch effort to boost a score for an otherwise risky borrower.
“Large or erratic transfers made inside of 60 days generate administrative headaches during underwriting, requiring extensive paper trails and letters of explanation to verify [the] source of funds,” he said.
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