29
Nov
By First Rate Financial Group
Mortgage Rates

What You Can Do Now to Prepare for Mortgage Rate Drops

As we move into the last month of 2024, many potential homebuyers are eagerly awaiting a drop in mortgage rates. With inflation numbers looking promising, there’s hope that the Federal Reserve will lower the federal funds rate, which typically drives mortgage rates down as well. If you’re planning to buy a home or refinance when rates drop, now is the perfect time to start preparing. Here are five key steps to get ready for the mortgage rate decrease and ensure you’re in the best possible position:

1. Improve Your Credit Score
Your credit score is one of the most important factors lenders use to determine your mortgage rate. A higher score can help you secure a better rate, potentially saving you thousands over the life of your loan. To improve your score:

  • Pay all bills on time.
  • Work on reducing credit card balances and avoid maxing them out.
  • Regularly check your credit report for errors and dispute any inaccuracies.

2. Assess Your Debt-to-Income Ratio (DTI)
Your DTI ratio helps lenders assess your ability to manage monthly mortgage payments. A lower DTI ratio (below 36%) is ideal, but you can improve it by reducing debt or increasing your income. Focus on:

  • Paying down high-interest debt.
  • Avoiding new credit obligations during the home-buying process.
  • Budgeting and prioritizing debt repayment.

3. Save for a Larger Down Payment
The more you can put down on your new home, the less you’ll need to borrow, which can lead to lower monthly payments and better loan terms. Saving for a larger down payment can also help you avoid private mortgage insurance (PMI). Consider:

  • Setting a clear savings goal and timeline.
  • Opening a dedicated savings account.
  • Automating your savings to stay consistent.

4. Explore Your Loan Options
Not all mortgage products are created equal. From FHA loans to USDA and VA loans, there are many programs designed to help you based on your unique financial situation. Research the different options available, such as:

  • FHA loans for first-time buyers or those with less-than-perfect credit.
  • VA loans offer no down payment for veterans and active-duty military members.
  • USDA loans for those buying in rural areas.
  • Non-QM loans for self-employed or non-traditional borrowers.

Connect With Us
The mortgage process can be complex, especially with changing rates. We can help you understand your options, improve your financial standing, and guide you through the homebuying journey. We will help to advise you on the best loan programs based on your situation and help you lock in the most favorable terms once rates drop.

 

25
Oct
By First Rate Financial Group
Mortgage Rates

What Is A Mortgage Par Rate And How Does It Work

Think of the par rate as the raw, default rate offered by a lender. It’s not the lowest rate you can get, nor is it inflated by any adjustments. Lenders determine the par rate based on a variety of factors, such as current market conditions, your credit score, the loan type, and the loan amount.

Discount Points: Lowering Your Rate

When you’re negotiating your mortgage, you can choose to buy “discount points” to lower the interest rate below the par rate. Each discount point typically costs 1% of the loan amount and can lower your interest rate by a fraction of a percentage point. For example, if the par rate is 5%, purchasing one discount point might reduce your rate to 4.75%.

While paying for discount points increases your upfront costs at closing, it can save you money over the long term. If you plan to stay in your home for several years, buying down your rate could reduce your monthly payments and save you thousands of dollars over the life of the loan.

Lender Credits: Increasing Your Rate to Reduce Costs

On the other hand, lenders may offer something called “lender credits.” Lender credits are essentially the opposite of discount points. Instead of paying a fee to lower your rate, you accept a higher interest rate than the par rate in exchange for credits that reduce your upfront costs, like closing fees.

For example, if the par rate is 5%, you might accept a 5.25% rate, and in return, the lender gives you a credit that could cover some or all of your closing costs. This option can be attractive if you’re short on cash for closing or would prefer to minimize your out-of-pocket expenses.

However, the downside to accepting lender credits is that you’ll pay more in interest over the life of the loan. The higher interest rate will lead to higher monthly payments and increased overall loan costs, which may outweigh the short-term benefits of lower closing costs.

How Is Your Par Rate Determined?

Several factors influence what par rate you qualify for:

  • Credit Score: Lenders view borrowers with higher credit scores as lower risk. The better your credit, the more likely you are to receive a favorable par rate.
  • Loan Type: Different types of loans (fixed-rate, adjustable-rate, FHA, VA, etc.) will have varying par rates.
  • Loan Term: A 15-year loan typically offers a lower par rate than a 30-year loan.
  • Market Conditions: Interest rates fluctuate depending on the overall economy and housing market trends. Lenders adjust par rates based on these factors.

It’s important to compare the par rates from different lenders and consider how buying points or taking credits could affect your overall loan costs. A par rate isn’t necessarily the rate you should settle for, but it gives you a clear starting point for negotiations.

Making the Right Decision for You

Ultimately, the decision to accept the par rate, buy down the rate with discount points, or increase the rate in exchange for lender credits depends on your financial situation and long-term plans. If you plan to stay in your home for a long time, paying for discount points might be worth the upfront cost. Conversely, if you’re looking for lower upfront expenses, opting for lender credits could make sense, especially if you plan to refinance or sell the home within a few years.

Understanding the mortgage par rate and how it works is crucial when shopping for a home loan. Whether you choose to stick with the par rate, buy it down, or increase it for short-term savings, being informed will empower you to make decisions that benefit your financial future. 

12
Sep
By First Rate Financial Group
Mortgage Rates

What Borrowers Need to Know About Mortgage Rate Locks

When it comes to securing a mortgage, timing is everything—especially when it comes to locking in an interest rate. Mortgage rates can fluctuate daily, and even a small change can have a significant impact on your monthly payments and the total cost of your loan. To protect yourself from rising interest rates while you’re in the process of buying a home or refinancing, you can use a mortgage rate lock.

What Is a Mortgage Rate Lock?

A mortgage rate lock is an agreement between a borrower and a lender that locks in a specific interest rate on a mortgage for a set period, typically ranging from 30 to 60 days. During this period, no matter how much market interest rates change, the rate you’ve locked in remains the same.

For example, if you lock in a rate of 5% for 30 days, even if rates rise to 5.5% during that time, you’ll still pay 5% as long as you close on your loan within the lock period.

How Does a Rate Lock Work?

The mortgage rate lock essentially “freezes” your interest rate during the home-buying or refinancing process. It’s particularly useful for borrowers who are concerned about potential rate increases but are not yet ready to finalize the loan.

Here’s how it typically works:

  1. Rate Lock Request: Once you’ve submitted a mortgage application and the lender has provided a rate quote, you can request a rate lock. Your lender will then agree to lock the interest rate for a specific period.
  2. Lock Period: The rate lock period typically lasts from 30 to 60 days but can vary based on the lender’s policies and your personal situation. If your loan doesn’t close within this timeframe, the lock will expire.
  3. Rate Lock Expiration: If your rate lock expires before you close on your loan, you may have to re-lock the rate at the current market rate, which could be higher or lower than your original locked rate.

Why Consider a Mortgage Rate Lock?

There are several reasons borrowers choose to lock in their mortgage rates:

  1. Protection Against Rate Increases: The most significant benefit of a rate lock is that it shields you from rising interest rates during the loan approval process. This can provide peace of mind, knowing that even if rates rise, your monthly payments will remain unaffected.
  2. Budget Certainty: By locking in your interest rate, you gain a clearer picture of what your monthly mortgage payment will be, which can help you plan your finances more effectively.
  3. Competitive Edge in a Rising Market: In a volatile market where rates are on the rise, locking in a low rate early can give you an advantage over other buyers or borrowers.

What Happens if Rates Drop After You Lock In?

One common concern with locking in a rate is what happens if interest rates drop after you’ve locked in. While a rate lock protects you from rising rates, it doesn’t necessarily allow you to benefit from falling rates—unless you have a float-down option.

A float-down option is an add-on feature offered by some lenders that allows you to lower your locked-in rate if rates drop before closing. However, this option usually comes with an additional fee, and not all lenders offer it, so it’s important to ask your lender about this possibility upfront.

The Costs of a Rate Lock

In most cases, locking in a mortgage rate is free, especially if the lock period is standard (30 to 60 days). However, longer rate locks—such as 90 or 120 days—may come with a fee or a slightly higher interest rate to compensate the lender for the risk of holding the rate for an extended period.

What Happens if You Need More Time?

If your closing process is delayed and you need more time than your rate lock allows, you have a few options:

  1. Rate Lock Extension: You can extend your rate lock for an additional fee, which is typically a percentage of your loan amount.
  2. Rate Relock: If your rate lock expires, you may be able to relock at the current market rate, though this could be higher than your original locked rate.

When to Lock in Your Rate

Deciding when to lock in your mortgage rate is a strategic move that depends on market conditions and how close you are to finalizing your loan. Here are a few tips to consider:

  • Watch Market Trends: If mortgage rates are trending upward, locking in your rate sooner rather than later can save you money.
  • Consider Your Closing Timeline: Make sure your rate lock period aligns with your expected closing date. If you’re unsure, it may be worth discussing a longer lock with your lender.
  • Evaluate the Costs: Be aware of any potential fees associated with longer lock periods or extensions, and decide whether they’re worth the peace of mind.

A mortgage rate lock is an essential tool for borrowers looking to protect themselves from rising interest rates during the home-buying or refinancing process. While locking in your rate offers security and peace of mind, it’s important to understand the terms of the rate lock, including its expiration and potential fees. Give us a call to ensure that your rate lock aligns with your financial goals and timeline.