7 simple steps to a dirt-cheap mortgage
By Luke Mullins
U.S. News & World Report
With the national housing bust still rippling through the economy, the battered real-estate market is offering up tempting incentives for consumers to jump in.
Home prices at the national level have plummeted more than 32% since 2006, presenting shoppers with some outstanding bargains. What's more, President Obama's stimulus package included a tax credit worth up to $8,000 for qualified first-time homebuyers and those who have not owned a home in the past three years.
Then there's the mortgage market. After the Federal Reserve announced plans beginning last fall to buy up long-term Treasury bonds and Fannie Mae and Freddie Mac mortgage-backed securities, mortgage rates dropped to all-time lows.
But consumers looking to take advantage of these attractive rates — through refinancing a mortgage or buying a home — are often left with puzzling questions: What direction are mortgage rates headed from here? Is now the best time to refinance? To answer those and other burning questions, U.S. News surveyed a handful of experts and compiled a list of seven simple steps to snag a dirt-cheap mortgage.
1. Know the trends. While 30-year fixed mortgage rates averaged a very attractive 5% for the week ending May 22, they spiked to 5.29% May 27. Keith Gumbinger, a vice president with the mortgage information publisher HSH.com, expects rates to remain a little above 5% for the rest of the year.
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"The Fed has plenty of balance sheet space to go out and buy enough mortgages to keep rates at these levels," Gumbinger says. And, heading into the last days of July, they had. Could mortgage rates end up higher? Sure. The massive amount of government debt needed to finance the Obama administration's huge bailout and stimulus programs has already pushed yields on 10-year Treasury notes — which fixed mortgage rates typically track — sharply higher. Mike Larson, a real-estate analyst for Weiss Research, believes this pressure will push mortgage rates even higher in the coming months. "I'm not expecting a huge move," he says. "A move to (about 5.5%) is very likely in the cards for the coming couple of months." But even rates of 5.5% are extremely low by historical standards.
At the same time, mortgage rates on "jumbo loans" fell sharply, from an average of 7.9% in the week ending Oct. 31, 2008, to 6.34% during the week of May 22, and have primarily remained below 6.5 percent since. Jumbo mortgages — those that are too large to be purchased by Fannie and Freddie — have loan amounts greater than $417,000, although this limit can be higher in certain parts of the country. Gumbinger says rates on jumbo loans could get even more attractive by the end of the year.
2. Pull the trigger. Mortgage rates, of course, are not the only factor to consider when deciding whether to buy a home. For consumers who are confident about their employment prospects and plan to live in the property for at least three to five years, the current mortgage rates make homebuying all the more attractive. "If near 50-year-low interest rates are not the proper inducement, what is?" Gumbinger says. And since calling the bottom of any market is nearly impossible, those looking to refinance are better off locking in today's rates, rather than hoping they head even lower. Larson calls pulling the trigger on current rates a "no brainer" for prospective mortgage refinancers. "Locking in makes sense," he says.
Still, anyone looking to refinance should ensure that the new rate would be at least a full percentage point below his or her current loan rate. That should provide enough of a monthly payment differential for the borrower to recoup the fees associated with the transaction over a reasonable time.
3. Understand the criteria. In the face of higher delinquencies, bankers have tightened lending standards for borrowers of all sorts. So while current mortgage rates are certainly attractive, only those borrowers who fit today's tighter credit profile will be able to access the cheapest financing. For a home purchase, those standards include a FICO score of around 720, a down payment of at least 3.5 percent, manageable levels of debt, and documented income verification. People looking to refinance, meanwhile, will need to document their income and must typically have an equity position of at least 10% in their home, Gumbinger says.
4. Clean and polish. Don't panic if you don't meet these requirements; there are steps you can take to improve your credit profile. Reduce your debt load by paying down credit cards or student loans. Consider putting off your home purchase for a couple of months as you save up for a down payment. To boost your credit score, obtain your credit reports from each of the three main credit reporting bureaus: TransUnion, Equifax and Experian. By law, consumers are entitled to one free credit report from each of these bureaus during any 12-month period, which can be obtained through annualcreditreport.com. Examine each report thoroughly to ensure that everything is accurate. "If you are a junior and your father is a senior who's got rotten credit habits, make sure that your report is distinguished from his," says Gail Cunningham of the National Foundation for Credit Counseling. If you discover any inaccurate material, contact the appropriate credit bureau about filing a dispute. Next, take care of any unpaid obligations and, in the future, make sure to pay all of your bills on time.
5. Shop around. Since rates and fees vary widely among lenders in today's market, consumers intent on getting the best mortgage deal will have to do some digging, says Rick Allen, director of strategic initiatives for Mortgage Marvel. "It comes down to shopping around," Allen says. "The market is pretty efficient, but different lenders are looking for different levels of profitability." Allen suggests consumers check out from three to 20 different mortgage providers and compare their mortgage rates, fees and closing costs. "Those three factors together ... really go to determine whether or not you are getting the best deal," he says.
6. Be patient. Because the Fed-engineered drop in mortgage rates was so unexpected — and occurred just as the industry was slashing jobs — many lenders have been inundated with applications. "In the beginning of the year, it was hard to find a lender who would even answer the phone and take an application," says Guy Cecala, publisher of the trade publication Inside Mortgage Finance. And although lenders have recently been beefing up their staffs, an average mortgage refinancing can still take about six weeks to close, Cecala says. That means borrowers should be persistent but patient. There are, after all, only so many phone calls that a lender can return in a day.
7. Be prepared. One way consumers can help improve the efficiency of the mortgage application process is to have all of their paperwork in order before speaking with a lender. "There is no excuse for not being prepared," Gumbinger says. "Go ahead and get your paperwork, get your documentation in order, go through your credit reports, do all of your prep work (beforehand)."
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