Some mortgage-seeking homebuyers are beginning to act like Black Friday shoppers — rushing for the sales, disappointed if they miss the door busters. “I guess it’s human nature to want a bargain,” says Joe Theisen, certified mortgage planner at Fairway Independent Mortgage, Sun Prairie, Wis.
Indeed, “some buyers — but not a significant number” have had to notch down their price range because mortgage interest rates have ticked up since early in 2013, Theisen says.
Still, overall home affordability is at record levels, even with the latest rate moves, says Walter Molony, spokesman for the National Association of Realtors.
(Home affordability is measured by looking at the purchasing power of a household earning the median income buying a median price home.)
Moreover, in a rising rate environment, borrowers can take measures to get the best rate possible:
Personal best
While there is nothing individuals can do about market winds pushing interest rates up, borrowers do control the forces shaping their credit scores.
Since only borrowers with high scores can qualify for the lowest rate offers, lenders say it pays to practice credit-boosting habits, ideally months in advance of buying.
The FICO score typically used by mortgage lenders ranges from 300 to 850, and “even a relatively small boost of 20 points in your credit score might push the rate down an eighth of a percent,” says Charles Chedester, former president of the Mortgage Professionals of Iowa, a trade group.
Months of on-time bill payments and low credit balances (relative to the card limit) are the keys to boosting scores over time.
However, “sometimes there are ways to ‘tweak’ things and see an immediate benefit to a score,” Chedester says. A loan officer might suggest moving a balance from a low limit card to one with a higher limit, for instance, he says.
Rating options
Transparency has its benefits. If you share with your lender how you plan allocate the dollars you have for your purchase, he or she may provide you with more rate options, Theisen says.
Typically, the higher the down payment a borrower makes, the lower the interest rate he’ll be charged.
Borrowers, however, can “buy down” a rate, Theisen explains, by paying a percentage of the loan amount upfront. That means someone planning a 15 percent down payment might be able to secure a lower rate by reducing the down payment slightly and using the funds for a “point” to be paid upfront.
This point (1 percent of the loan) typically lowers the rate a quarter of a percent, Theisen says.
Dan Gjeldum, senior vice president of Guaranteed Rate in Chicago, however, says borrowers will rarely recoup those upfront dollars in points through reduced monthly mortgage payments in a matter of a few years. Those who choose this route should plan to stay in the home long-term.
Shopping list
When rates are on the rise, how’s a buyer to know what he can afford when his mortgage pre-approval was rendered in a lower rate environment?
“I don’t think [pre-approval] should be based on one current rate,” says Chedester. “I tell borrowers to look at a range, with one end based on slightly higher than what they can currently get.”
When buyers finally find a home and make a formal mortgage application, they are locking in rates “almost 100 percent of the time now,” Gjeldum says.
Locks guarantee that borrowers will receive the rate at application when the loan closes, which may be anywhere from 10 to 75 days.
“The shorter lock (10 days) is typically 0.125 percent better in rate than a longer lock — 45 to 75 days,” Gjeldum says.
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