What can Chicago home buyers do when mortgage interest rates are over 7%? Strategize! Waiting for the market you want isn’t realistic. By the time rates come down, home prices will be higher, and your home buying competition could be worse. Your best option is to plan for the market you have! Otherwise, you could sideline yourself by waiting for perfect conditions that aren’t coming.
Here are 5 ways home buyers can get a better mortgage interest rate:
1. Improve your credit score. Unless you already have an excellent credit score – considered to be a FICO of 800 or above – consider paying down, or paying off, your debt obligations. The less debt you have outstanding, the better your credit score. The better your credit score, the better your mortgage offers!
Also, the less debt you carry, the better your debt-to-income ratio, or DTI, will be. Your DTI affects how much of a housing payment you can afford.
2. Make a larger down payment. Some mortgages allow down payments as low as 3%, or even zero percent. However, lenders love to see down payments of 20% or more. When you make a large down payment, lenders see you as less of a credit risk. In return, you get better mortgage offers.
Additionally, putting at least 20% down eliminates the need for private mortgage insurance (PMI). This could save you $100 a month or more on your mortgage payment.
3. Explore Adjustable-Rate Mortgages (ARMs). Adjustable-rate mortgages start with a fixed interest rate for a set period, which could be 3 years, or 5 years, or more. After that, the interest rate will be adjusted each year according to financial market conditions. This presents a risk if rates are higher in the future – because your mortgage payments could go up.
The escape hatch for an ARM loan would be to refinance into a fixed-rate mortgage, or if you plan to move in a few years, sell the home and pay off the mortgage.
4. Seek a mortgage buydown. A motivated seller or home builder might offer a mortgage buydown as an incentive to buyers. Mortgage buydowns are basically a form of pre-paid mortgage interest that is paid by the seller. This “buys” a lower interest rate – temporarily – from the lender.
For example, a 2-1 buydown means the interest rate is reduced for the first two years of the mortgage. The rate would be 2% lower during the first year, then 1% lower the second year. The rate would reset to the full locked-in rate by year three, meaning your payment goes up to what it would have been all along without the buydown. Read our blog post on buydowns for more examples!
5. Lower the rate by paying points. Points are pre-paid interest that allow you to get a lower rate over the life of your mortgage. A point is 1% of your total home loan amount. On a $300,000 mortgage, one point would cost $3,000.
While this seems simple, the actual discount it provides on your interest rate is more complicated. You might get a 0.25% reduction in your interest rate for paying a point. (This can vary by lender.) Before you elect to pay points, look at the loan amortization and the amount of savings you can expect. Consider the monthly cash flow benefit to your mortgage payment, as well as the interest savings over the life of the loan. If you are staying in the home long term, paying points can make sense.
There’s one more strategy. Get a mortgage you can afford today, and refinance later, when rates are lower! The problem is, no one knows what interest rates will be in the future. Make sure you can afford your mortgage long-term, so you don’t find yourself in trouble down the road.
We can refer you to trustworthy mortgage lenders who will explain all of your options. Just ask! Call 847.348.1154.
StartingPoint Realty – serving Chicagoland since 2004!
StartingPoint Realty proudly serves home buyers and sellers throughout the entire Chicago area. We offer free, first-time home buyer seminars every month! Contact us for your free home buying or home selling consultation!
Ryan Gable Broker/CEO Starting Point Realty
Phone: 847.348.1154
Email: RyanGable@startingpointrealty.com
https://startingpointrealty.com/
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