When mortgage rates are low, many people jump at the chance to refinance their home loans or purchase new homes. This is a smart move from a financial standpoint. The lower the interest rate on a mortgage loan, the less a borrower pays monthly and over the life of the term. Low rates are perfect for those who want more house for their money, and with a fixed rate, borrowers don’t have to worry about their rate increasing.
Low mortgage rates don’t only benefit borrowers, they also banks. Some people purposely hold out and only apply for new mortgages when rates drop. This usually triggers an increase in mortgage applications, as many people rush to snag a better rate. This generates a lot of extra work for banks, but they don’t mind the business. The more loans banks create, the more they earn. But all good things eventually come to an end, and unfortunately, low rates aren’t the only thing impacting mortgage applications.
Mortgage rates can remain low for several years or months, but as history proves, they never stay put for long. Take for example mortgage rates for the week of July 31, 2013. The average rate for a 30-year fixed mortgage was 4.59%, up nearly one percentage point from three months earlier, says Bankrate.com.
How does this impact mortgage applications?
According to the Mortgage Bankers Association, home loan applications dropped four times in five weeks, which proves that rate increases don’t go unnoticed. But why the sudden drop in mortgage applications?
The answer is simple: borrowers don’t want to pay more than necessary for a mortgage. The average borrower isn’t going to stress about slight interest rate increases, such as rates going from 4.1% to 4.3%. In this case, the difference is less than $20. However, once interest rates start to increase by whole percentage points, the difference in monthly payment can be well over $100.
Not an issue if you’ve got some wiggle room and can afford a slightly larger payment. But if you barely qualified for your mortgage at the lower rate, any increase can kill the deal. Interest rates have a huge impact on affordability. Borrowers know this, and for those looking to keep their mortgage payment around a certain ballpark, an interest rate increase makes buying and refinancing less attractive.
But let’s say you don’t want higher rates to interfere with your buying or refinancing plans? Understand that interest rate averages are just that – averages. There are ways to negotiate a better rate and keep your payment affordable.
- Raise your credit score: Increasing your credit score by as little as 20 points can make a difference. For example, the rate on your mortgage with a 740 credit score might be 4.3%, but with a score of 760, your rate might drop to 4.0%. Pay your bills on time to add points to your FICO score.
- Pay down debt: Another factor that helps lower your rate: paying down your existing debt. Lenders will see you as less of a risk.
- Increase your down payment. The more stake you have in the property, the better. Aim for a down payment between 10% and 20%.