Buying a home in a changing market
June 02, 2023
A home loan, otherwise known as a mortgage, enables you to purchase a house without paying the full price out of pocket at the time of the purchase. For most people, buying a home is the biggest financial transaction in their lifetime. For that reason alone, if you’re in the market for a new home, it’s best to learn all you can about home loans so that you can make the best decision for you.
Rates fluctuate daily
Borrowers who are eager to secure a home loan with a low interest rate may get into the habit of checking mortgage rates as often as some people check the weather. Interest rates fluctuate every day, which means the rate you see today may be different than the one you see when you are approved for the loan. Even though interest rates can affect the total cost over the life of your loan, what you should focus on is your monthly payment amount.
If you are looking to purchase a $200,000 home at a 6% interest rate, your monthly payment would only change approximately $74/month if the rate were to jump .5%. Now $74 can sound like a lot of money, but if a family of 4 committed to eating out one time less per month, you could easily make up for that difference in payment. Figure up what payment amount you would be comfortable with and then determine what home you should be looking for at that price point. Don’t have an idea of what you could afford? You can use our home affordability calculator to calculate an affordable monthly payment based on your income and current debt.
The cheapest interest rate does not guarantee the cheapest loan
When choosing a lender, borrowers will often choose the one offering the lowest interest rate, but this can be to their detriment. There are several factors to consider when choosing a lender. One thing to consider is the lender’s closing costs. Closing costs usually cover fees related to the origination and underwriting of a loan, real estate commissions, insurance, property taxes, and transaction recording costs. Lenders are required to provide this as part of the loan application process. You can use our home closing costs calculator to help you determine an estimation of closing costs.
These costs don’t, however, include a down payment, which is required on most home loans. On average, most borrowers will be looking at paying 3-5% of the loan amount upfront for a down payment on a home. If you are purchasing a home for $200,000, you could be looking at approximately $6,000-$10,000 for a down payment. All these fees and closing costs can add up quickly and should be considered when determining your lender. You can request an appointment with one of our mortgage professionals and they can answer any questions that you have.
Knowing which mortgage you should choose
Another determining factor on the cost of your loan is what type of mortgage you choose. Most standard mortgages are 30-year fixed rate, 20-year fixed rate, and 15-year fixed rate mortgages. The longer the loan, the lower your monthly payment. When interest rates are low, many homebuyers choose a mortgage with an interest rate that is fixed throughout the life of the loan, believing it is the most cost-effective choice. This may or may not be correct.
Another option would be to consider an Adjustable-Rate Mortgage (ARM). This loan often will have a lower interest rate upfront but since the rate is adjustable, could be subject to increase or decrease later down the line. A fixed-rate mortgage might come with higher exit fees, or fees paid to the lender when the loan is repaid. Also, if rates drop further throughout your loan’s term, you won’t be able to take advantage of the new rates unless you refinance. Finally, interest rates on fixed-term mortgages are generally higher than the initial rate on ARMs. It’s best to speak to your lender about the different loan options to determine which option would be best for you.
A lower credit score can cost you tens of thousands of dollars in interest
Most people know that a higher credit score is generally awarded with a lower interest rate, but not many people know to what extent this is true. A high credit score can translate into tens of thousands of dollars in interest payments over the life of a home loan. MyFICO calculator can give you a real sense of the money you could pay over the life of your loan. A credit score difference of 100 points can increase a monthly mortgage payment by $150 or more per month, depending on the size of the loan and the interest rate. Your credit score reflects your past usage, which lenders use to measure how responsible you are with credit. If you are thinking about buying a home and have a lower credit score, you may consider boosting your credit before applying for a loan. This could take as little as a few months, if you are serious about taking the steps to do so. One of the ways to accomplish this is by paying off past debt.
Lenders also look at DTI (debt-to-income) as a critical evaluation point when considering lending money for a home loan. DTI is calculated based on two numbers - your debt, and your income. It’s not always easy to increase your income overnight, and your lender will most likely look your previous two years’ worth of income to come up with an average income. However, if you could pay off some debt before applying for a loan, it could increase your credit score, and lower your DTI, which will help you in the application process. If you would like to determine your current DTI, you can use our DTI calculator.
The housing market impacts rates
While the Fed’s rate will have the greatest impact on the rise and fall of interest rates, the state of the housing market will affect the rates as well. Lenders need to be able to turn a profit from their loans, and the way they do that is by acquiring more home loans. When the housing market is booming and lenders have a higher loan count, they will be more inclined to offer lower interest rates to borrowers. When the housing market slows down and less people are buying homes, interest rates will consequently increase.
You can set reminders for mortgage payments
Your home loan payment will most likely be your largest monthly bill. Missing a payment or paying it late can potentially have some serious consequences. It’s not likely that you will be faced with a late fee immediately, but if you allow the payment to be a few weeks late, you could be faced with a late fee of some kind. You may receive a letter stating that you are in default, which is the earliest stage of the foreclosure process.
If your payment becomes 30 days overdue, it could result in a negative mark on your credit report. It’s important to be in communication with your lender if you are late making a payment so that they are aware of the situation. With the current inflation, we understand how much you keep up with when it comes to bills and monthly payments.
One thing you could do is set up payment reminders to ensure that you won’t be late making a payment. One easy to use resource is called PayPrompt, a convenient text messaging solution that reminds you of upcoming payment due dates. It’s a free resource to those that have loans through Education First FCU.
There are a lot of things to consider when wanting to purchase a home, but having a team of professionals there to answer any questions you have and guide you through the process will be the best decision you make. You can visit our mortgage center to begin your application process. If you would like to find another resource about the home-buying process, you can download our eBook, The First-Time Homebuyer’s Guide.