TOP 5 ways to get the best mortgage rate possible
Mortgage interest rates are the highest they've been in 20 years, making homes unaffordable for many buyers. Let's take a look at the top 5 ways to get the best mortgage rate possible as we finish out 2022 so you can still enter the market today and take advantage of the best market buyers have seen in years.
1. Check your credit score
This might sound obvious, but one of the biggest mistakes buyers are currently making in regards to their credit score is not checking it early and often. If you don't pay attention to it until a few weeks before applying for a mortgage, if you don't have the score you want, you won't have the time needed to fix it before applying for the loan which will dramatically impact the interest rate the lender can give you.
I recommend starting to check it 6 months in advance so if it's not where you want it to be(740+ is typically going to give you the best rates but a minimum of 680 is often recommended), you'll have enough time to work on paying down debt, disputing issues you find, etc. Not sure where to start with fixing your credit? I have great referrals to credit repair specialists that can go over the most effective ways to boost your score before applying for a loan. Need a credit repair referral? Contact me today!
2. Apply with multiple lenders
Another common mistake buyers are making in today's market is only applying with one lender. Right now lenders are competing for business more than they have had to over the last few years so you really need to be talking to credit unions, mortgage brokers, etc to make sure you are getting the best rate, as well as loan program, that fits your financial needs.
Worried about how all those applications will impact your score? DON'T. Yes, when the first lender runs your credit your score it will temporarily drop slightly, but after the first credit inquiry any other lender that runs your credit in the next 45 days will not impact your credit score because the credit bureaus have shopping around for a mortgage built into their models so you don't get penalized for trying to find the best rate.
3. 2-1 Buy down
This is a loan option where in today's housing market buyers could ask the sellers to credit them the cost of this product and by doing so, the buyer would get a significantly lower interest rate for the first two years of the loan. A 2-1 buy down will give you an extremely low rate the first year, a slightly higher rate the second year, and then go back to your normal rate on year three. So for example, you might get approved for an interest rate of 6.5% but by using the 2-1 buy down you might get a 4.5% interest rate the first year, 5.5% rate the second year, and then it adjust to your normal rate of 6.5% the third year.
The biggest thing you need to consider when looking at this loan product is can you comfortable afford the highest rate in year 3. Yes, there is a good chance that within the next 24 months you'll have an opportunity to refinance your loan at a lower rate, however as a responsible home buyer you need to assume that you won't be able to do that and need to be able to afford the rate you get on the 2-1 buy down once it normalizes.
4. Full term buy down
This is another buy down option where you can ask the seller to credit you the money you need to effectively "buy down" the interest rate you are approved for. The two main differences between this buy down and the 2-1 buy down are:
1)The rate drop isn't as dramatic (typically .5-.75%)
2) This is for the life of the loan and never goes back up
So if you can get the seller to basically buy a better rate for you, which again, in today's market is becoming almost common place, it's almost a no brainer. But what if the seller won't pay for it? Would is still be worth it to pay the cost yourself to get the lower rate? To answer that question you just need to have a general idea of how long you plan on being in your home. The longer you are in the home, the more cost effective it will be for you. When discussing this option with your lender they can provide you with a break even analysis to let you know exactly how many months you need to stay in your home to break even, so the clearer you are on how long you plan on staying in your home, the easier it will be for you to determine if this product will work for you.
5. Assuming a seller's current loan
Because we haven't been in an environment were rates have gone up and not down for more than a decade many buyers and sellers don't even know this is an option. So let's go over how it works. If the seller of the home has an FHA or VA loan (occasionally this can be done with a conventional loan but not very often) on the property, often times the lender will allow a buyer to take over the remaining loan from the seller.
For example, let's say the seller is asking $800,000 for their home and they currently still owe $700,000 on the house. If they buyer is able to get qualified and comes in with the difference between the sale price and the remaining balance of the loan, in this case $100,000, they could take over payments on that loan. If the seller secured a low interest rate on their original loan of let's say 3.5%, then the new buyer will keep that same rate. So you can see how beneficial this could be for a buyer. This is a way for buyers to take advantage of the low rates we saw over the last few years, TODAY.
Again, this only works for certain loan types and in order for the buyer to be able to use this option they do typically have to have a significant downpayment to cover the costs, as well as they also have to qualify through the lender still to take over the loan, but if they can find the right property this strategy could help the buyer secure the lowest rate they could get anywhere.
Also, a quick note for home owners, if you are thinking of selling and have an FHA or VA loan, it would be extremely beneficial for you to find out if your loan is assumable, because if so, you could be sitting on a gold mine when you go to sell. This is a HUGE benefit and will help you attract a lot more buyers.
Hope you can use some of these strategies outlined above to get the best rate possible if you are thinking about buying a home in the next 3-12 months. If you still have questions, or want to find out more about how to use these strategies or what programs are out there to not only help you with the interest rate but also downpayment/closing costs(there are a lot of them for all types of buyers right now), reply to this email or SCHEDULE A TIME TO TALK TO ME BY CLICKING HERE
Want a FREE market analysis of your home with no pressure to sell? I'll review with you what your home is currently worth, what you would net from the sale, other ways you can use the built up equity in your house, and give you all the up-to-date housing market info on your specific neighborhood so you can be the most educated owner on your block. Reply to this email or contact me by phone (714)-366-2186 for the free home equity analysis now!
Rather read the entire video episode instead?
Josh Alexander 0:00
Have you been wanting to purchase a home but the spike in interest rates that we've seen this year has made it unaffordable to you want today's episode, we're gonna go over the top five ways that you can get the best interest rate possible on your new mortgage so you can afford to move into that new house. Hi, I'm Josh Alexander, and your host of Orange County Housing market news, your one stop shop for all things Orange County real estate. So on today's episode, like I said, we're going to be going over the top five ways and most of them are free to be able to get you the lowest mortgage industry possible so you can afford getting into that new home. So let's go ahead and get into
Josh Alexander 0:37
it. Interest rates are currently at 20 year highs right now. And on top of that, we have seen a giant skyrocketing of housing prices over the last couple of years, which makes those monthly mortgage payments extremely hard for a lot of buyers right now to afford. So on today's episode, we're going to be going over those top five things that you can do to make sure you're getting the best interest rate possible on your home. So number one is going to be check your credit score. Now this might seem obvious, however, one of the biggest mistakes that a lot of buyers are making is they don't really monitor their credit score until they're a few weeks out before they start applying for loans. And at that point, if your credit score is not where it needs to be, it's going to be very hard for you to fix it in that short of a timeframe.
So my recommendation is before you decide to purchase a house at least a few months in advance, I recommend six months in advance, start monitoring that credit score if that credit score is not where you want it to be. So most lenders require a score of around 740 to 760 or above to get the best rates possible. And if you're just trying to improve your score as much as you can, and you know, you're not going to be able to get it that high, you still have enough runway to be able to do that, you can start paying down your debts and seeing that score start to go up. And if you don't know where to start, this is a great opportunity for you to reach out way ahead of time, talk to a lender talk to a real estate agent. And they can recommend a credit repair service that's going to help guide you through the process to get your score up to the highest point that you can get it within that given timeframe. So again, you want to make sure you're monitoring this way ahead of time, ideally months in advance. So that way you can take care of any issues that pop up. So you get the best interest rate when you decide to apply for a loan.
So the second thing you can do to improve the interest rate you're getting on your loan is make sure that you're talking to multiple lenders, when you decide to go through that pre approval process, every lender is going to be a little bit different in terms of the rate they give you the programs they offer, as well as the fees that you need to pay in order to be able to get those low interest rates. So make sure you're doing your due diligence. And speaking to multiple lenders, if you have a credit union you work with, typically credit unions are going to give you great rates.
If you're talking to a mortgage broker, they're going to be able to shop around and find the best program for you to give you the lowest rate possible. So I typically recommend that you talk to three different lenders when you're going through this process to know that not only are you getting the best rate possible, but you're finding a lender that you're going to work well with. And that's going to have the best program based on your specific financial needs. Now real quickly, one question that I get often about talking to multiple lenders to find the best rate possible is how much is that going to impact my credit score? Well, the credit score will be impacted when the first lender does a hard inquiry on your credit to be able to see if you can qualify for the loan.
However, right now in the United States, as long as you talk to other lenders within a 45 day period, your credit score shouldn't drop any more after the initial credit hit when the first lender looks at it. So you can talk to 2345 Different lenders, and your credit score is only gonna go down when that first lender actually goes and runs your credit. So feel free to go out and look at multiple lenders to find the best rate possible and know that it's not going to dramatically impact your credit score. So you first got your credit score as high as it could be before you applied for loans. You went and applied to multiple lenders for those loans to find the best rate possible.
Now comes number three. And this is when you actually start placing offers. And this is where the seller can actually help you get a lower interest rate than the lender is even offering. So the first way they can do this is what is called a two to one buy down. So what this basically does is it drops your interest rate a significant amount for the first year, it goes up slightly more than a year after that. And then the third year it goes to the normal rate. Now this is something that you can actually ask the seller to pay for. So it's no money out of your pocket and could make sense in some circumstances. Now something that might pop in your head when you hear about this is Wait a second. This sounds like one of those arm products that got a lot of homeowners in trouble back in 2007 2008 and 2009. So this is something that number one, you need to make sure that you can comfortably afford the highest interest rate, which is that year three interest rate and are not going to have any issues with that. Are you going to have an opportunity to maybe refinance and get a lower rate within the first two years? It's a possibility but you can't bet on that you
Josh Alexander 4:59
need To make sure that you can afford that higher rate. And you also have to understand that this buydown is something that you're asking the seller to pay for. So it's not coming out of your pocket, it's basically just a free lower interest rate for the first two years. And then it goes up to the normal rate after that. And because in today's market, we are no longer in this hot seller's market, sellers are starting to make concessions and giving credits for buyers to do these type of things to help out with those monthly payments.
Now, obviously, again, this is not going to be for everyone, but it's a product out there that could help you temporarily lower that interest rate for the first year or two. And again, hopefully, you might be able to refinance, but you need to make sure that you can afford that higher rate. And this leads me to the fourth way you can get a better interest rate and also has to do with a buy down program. But this is going to be for the life of the loan. So again, you're going to be negotiating with the seller asking them to credit you to purchase a lower rate for your interest rate, except this time, it's going to be for the life of your loan. So you're not going to get as big of an interest rate discount, like you would on those two to one buy downs, we're typically you might be getting a normal six and a half percent interest rate, but the first year, you're only paying four and a half percent, then it goes to five and a half percent before it goes to the full rate of six and a half percent on these long term buy down programs, you might be getting a half percent, or maybe three quarters of a percent difference on those payments.
However, this is again for the life of the loan. And typically in this market, it's a good idea to try to get the seller to pay for that. Now if the seller doesn't want to pay for it, and you still want to buy down that rate and you have the cash to do so as long as you're going to be in the home long term. Typically, this type of buy down program will end up paying for itself. Now to best determine if this program is going to be right for you, the best thing to do is really discuss it with your lender, they're going to be able to show you a graph in a table saying if you spend this amount of money and get a lower interest rate by this percent, it's going to take this amount of months for you to break even. And after that you end up making money. So a lot of it's going to have to do with how long you plan on being in the property. And again, you can talk to your lender, because they're going to be able to give you the breakdown of when that break even point is.
So you know if it's something that's going to work for you and your family. So now let's go ahead and go over the fifth and final way that you can get a lower interest rate when going to purchase a house. And that's called assuming the seller's loan. So what this basically does is that if the seller has a VA, or an FHA loan, a lot of lenders will allow the buyer to assume that loan. And what that means is, let's say they have a property that you're paying $800,000 for the seller still owes $700,000, you would need to bring to the table the difference of that 800 to 700,000, which is $100,000. But by doing so, you're going to be able to take over that loan at whatever interest rate the seller had. So if the seller either bought their home or refinanced over the last two years, and has an interest rate at two and a half or 3%, you're going to be able to capture that interest rate and keep the interest rate for the life of the loan. So that's going to be the absolute best way to get the absolute lowest interest rate possible. However, this is not going to work in a lot of circumstances. Because one, you have to have the downpayment for it. And typically, you're gonna need a sizable downpayment to cover the difference between the purchase price and whatever the seller has left on the loan.
But if you do have that downpayment, this is a great option for those sellers, again, that are using an FHA loan or a VA loan on the property. So you need to make sure that you're talking to your agent, making sure that you ask the seller what type of loan do they have, how much they have left to pay off to see if it could be a possible option for you. Yes, it might take longer for you define that
Josh Alexander 8:36
ideal situation that's going to work out with you based on your downpayment and how much the house is. But if you're able to find that it's going to be a goldmine in terms of the interest rate you're going to get. So it could be worth the wait, and is definitely worth exploring with your agent. So if you are thinking of looking for a home in the near future, but you've been discouraged about those interest rates, these are some strategies that you can use to be able to knock down those interest rates and make the homes affordable for you again, and I would definitely encourage you to look into these before you completely give up because right now based on the current market trends, we're heading closer and closer to a buyer's market where sellers are making a lot more concessions paying for a lot of these buydown products, as well as you're able to secure property below asking price right now in Orange County, almost 50% of homes have had to do price drops.
So there's a lot of negotiating power that buyers have right now. So if you're able to afford the monthly payments are you're very close to it right now. And you're just kind of on the edge. These are some programs you can use to get you over that hump into a house right now. And you're able to negotiate a great offer because of the current market conditions. Now if you're watching this and you purchase the home recently by using one of these strategies, please comment below share your story, I'd love to be able to see examples of how buyers are using these strategies to get into homes right now with a lower interest rate as well as take advantage of the current market conditions to be able to negotiate in their favor. So as always, if you have any other questions I'm here to help please DM me comment below. I'll answer any questions. And until next week, stay healthy, stay happy and I will see you on the next show.
