Mortgage rates have been volatile this year due to COVID-19. Although mortgage rates today increased for the first time in 3 weeks, they are still considered low. Here’s how they moved this week.
- The 30-year fixed-rate mortgage averaged 3.13% APR, an increase of nine basis points from the record low the week before.
- The 15-year fixed-rate mortgage averaged 2.68% APR, five basis points higher than the previous week’s average.
- The 5/1 variable rate mortgage averaged 2.99% APR, 12 basis points higher than the previous week’s average.
With 30 years still hovering around 3%, now is a great time for people to buy a new home – but the trick is to make sure you can lock in one of those low rates. Here are the top 5 factors that influence your rate and what you can do to improve them.
Keep in mind that while every factor is important, lenders will look at your full financial situation. So while one of them may be a problem for you, if you are strong on the others, you may still be able to benefit from a low rate.
1 – Your credit score: This is probably the most important factor in securing a low mortgage rate. Make sure your score is as high as possible before getting quotes. Many lenders use the FICO model for credit scores with a range of 300 to 850 points, with a higher score indicating less risk to the lender.
- 800 or more: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 579 or less: poor
How to improve: While the best mortgage rates are usually only available to those in the very good and upper range, if you are in a lower category there are ways to increase your score. First of all, you need to understand how scores are calculated. Using the three reporting credit bureaus (Experian, TransUnion, and Equifax), FICO credit scores are calculated as follows:
- 35% is based on your payment history, so always make sure you make your payments on time.
- 30% is based on your credit usage, which is the total amount of credit you use. If you have $ 10 of available credit on a credit card and you use $ 4,000, you have a 40% usage rate. To increase your credit score, try to keep it below 20%.
- 15% is based on the length of credit history. Avoid closing long-standing accounts that are in good standing. It will also help you with your utilization rate.
- 10% is based on new credit accounts. If you are looking to get a new loan, only open new accounts if necessary.
- 10% is based on the composition of the credits. Lenders want to see a mix of different types of loans, such as installment loans and revolving credit.
Make sure you regularly check your credit report for errors. You can get a free copy of your credit report once a year at annualcreditreport.com. If you find any errors in your report, you can file a dispute with the three major credit bureaus.
2 – Professional history: Lenders want to make sure that you have a stable job and income. If you have worked in the same location for a long time and can see steady growth in your income, you are more likely to get a low rate because lenders are confident that you will have the income to make the payments. The opposite is also true: if you have changed jobs recently or several times in the past few years, it will be more difficult to lock in a low rate.
How to improve: If this is a problem, look for lenders who are more forgiving on work history. Traditional banks can review your last two years of employment, while lenders like Accelerate may only look at the last 12 months. Plus, if you’ve just started a new job, it might not be the best time to take out a mortgage. You may want to consider waiting to be sure this job is long term.
3 – Deposit: The more money you can deposit up front, the less risk you run with a lender. This not only means a lower loan amount, but also a lower loan to value ratio. A low LTV ratio means less risk.
How to improve: Instead of just setting the minimum requirement, put down a 20% deposit.
4 – Debt / income ratio: Your debt-to-income ratio (DTI) is all of your monthly debt payments divided by your gross monthly income. This is used by lenders to determine your ability to handle monthly payments to repay the money you plan to borrow. The higher the ratio, the more likely you are to have difficulty making your mortgage payments. The highest DTI most lenders will accept is 43%, but most want to see less than 36%. A lower DTI will increase your chances of being accepted by a top mortgage lender, and get a good rate.
How to improve: If your DTI is high, there are two ways to lower it. The first is to pay off some of your debt. The debts included in your DTI ratio are things like credit cards, student loans, car payments, and child support.
- Example: If you earn $ 10,000 / month and your total monthly debt is $ 4,000, your DTI is 40%. This is within the acceptable range for most lenders, but you may not get a maximum rate. If you can reduce your credit card balance, thereby reducing your new monthly payment to $ 3000 / month, then your DTI becomes 30% and you will qualify with better lenders.
The second way to lower your DTI is to increase your income. It’s more complicated, as lenders like to see history and consistency with income, but if you are planning to buy a home next year, start looking for ways to increase your income now with tips. , contracts or additional work from PT.
- Example: as above; you earn $ 10,000 / month, your total monthly debt is $ 4,000 and your DTI is 40%. If you can increase your income to $ 12,000 / month, your DTI drops to 33%, which puts you in a better range again.
5 – Pay your points: Yes you can actually â€œBuyâ€ a better mortgage rate by paying points. A â€œpointâ€ is an upfront charge you can pay to reduce the interest rate on your mortgage. Typically, each point is equal to 1% of the total mortgage amount. On a $ 200,000 mortgage, for example, each point would cost $ 2,000 up front. Each point lowers the interest rate on your mortgage by about an eighth to a quarter of a percent.
One of the most important tips for new buyers is to shop! Not all mortgage lenders are created equally. Some specialize in buyers who cannot afford a large down payment, while others are more relaxed about the debt-to-income ratio. There are lenders that specialize in military family loans and those that cater specifically to low income families.
Do your research, identify three prospects, and get a quote from each before locking down anything. For a good place to start, Money.com provides their Top list of mortgage lenders for 2020.