Here’s How To Lock in a Low Rate

The pandemic-related consumer issues started with toilet paper shortages and evolved into record high home prices, leaving potential homebuyers scrambling to find an affordable home.

What’s more is the supply of homes for sale has hit a five-year low, with only one month of supply available according to Redfin. So, if no more homes were to come on the market and people were to continue buying at the same rate, the current supply of homes would completely vanish after one month. Plus, the Federal Reserve is planning on raising its record-low interest rates multiple times this year.

This leaves a bleak picture of fewer, more expensive homes available for purchase and more costly financing. This sentiment is reflected in the Jan. 2022 Fannie Mae National Housing Survey, where a survey record-low 26% of consumers believe it’s a good time to buy a home.

However, there are several things consumers can do to give themselves a fighting chance of securing a home without paying significant mortgage interest costs.

Select details how we got to this point, the current state of interest rates and what experts are saying you can do to be a competitive buyer.

As the economic shutdown set in during March 2020, the Federal Reserve dropped interest rates to basically zero, nearly overnight. In Feb. 2020, the interest rate was roughly 1.5%. Two months later, it was 0.05%.

The Fed’s actions contributed to a steady decline in mortgage rates, where the average 30-year mortgage rate hit a low of 2.65% in Jan. 2021. Since then, the average mortgage rate has climbed to 3.56% as of Jan. 21 — matching rates prior to the first shutdowns and hitting a 22-month high. And it’s not looking like they will slow down as several Federal Reserve members have stated they are predicting three interest rate hikes to fight back against inflation rates not seen in over 40 years. However, no finite decisions have been made as of yet.

Josh Westreich, branch manager at U.S. Mortgage of New Jersey told Select it’s “doubtful that rates slow down until the [Federal Reserve] makes a decision.” He added that the only two factors driving this spike are “speculation and uncertainty.”

Mortgage rates and interest rates set by the Federal Reserve are closely tied to one another. As the Fed cuts and raises interest rates, mortgage rates will typically follow suit. Additionally, rates tend to swing as the 10-year Treasury yield swings upward, and it’s currently approaching pre-pandemic levels. But each lender can offer different rates to customers based on their level of risk and types of customers they decide to serve. But in this case, banks are raising rates in anticipation the Fed will do the same.

And while borrowing money for a home has been historically cheap throughout the pandemic, home prices have not mirrored that. Because of a lack of housing supply and record-low mortgage rates home prices have skyrocketed since March 2020. In Q1 2020, the median home sale price was $329,000. In Q3 2021, it was $404,700. 

In summary: housing has become extremely expensive and the cost of borrowing money to purchase a home is quickly rising, with no signs of slowing down. So, how can you lock in a favorable interest rate in this difficult environment?

While economic factors are out of the control of consumers, Westreich believes home buyers can help still improve their shot at getting a lower interest rate, as mortgage rates “are determined for the most part on two factors: credit score and equity/down payment.”

He strongly advocates to save up as much as possible for a down payment while simultaneously working to improve your credit score. He told Select that consumers should “pay down all revolving debt to 30% of the credit limit and try not to open or close any accounts.” Essentially you need to keep your credit utilization ratio low and avoid opening or closing any new credit cards or loans before you apply for a mortgage.

Tara Falcone, CFP and founder of the goals-first investing app Reason, reiterates Westreich’s mantra — adding that consumers should think and prepare carefully before buying.

“It’s important to focus on the total purchase price rather than the monthly payment,” she said. It may be tempting to buy a home you qualify for, but even if you lock in a low interest rate, being ‘house poor’ (meaning a majority of your income is going to your home costs) isn’t a recommended strategy.

And just like any other financial decision, Falcone recommends consumers take the time to shop around to get the best interest rate.

“Get referrals for mortgage lenders from people you know and trust in your area,” said Falcone. “Speak to everyone from banks to online mortgage lenders, and make sure to do your own rate research ahead of time.”

So to get the lowest mortgage interest rate possible: improve your credit score (keep your credit utilization ratio low and don’t open and/or close any new accounts), save up for a solid down payment and shop around for the best rate.

Saving for a down payment on a home and improving your credit score are both long-term personal finance goals, but you can still take steps to get started today. 

First, consider using a credit monitoring service, like Experian or IdentityForce. Many of these services are offered for free by multiple financial institutions, and can help you understand the factors that affect your credit score. And if you see something that may be incorrect or negatively affecting your score, you can take a proactive approach to fix those issues.

In addition, you may want to sign up for a high-yield savings account to put away money for a down payment. While interest rates on these accounts remain low, every dollar you can earn in interest will bring you closer to your goal of buying a home. It isn’t advisable to keep your money in a checking account as there is basically no interest accruing, and investing the money is likely too risky as you don’t want market volatility to affect the ability to buy a house. However, some robo-advisors, like Wealthfront, will create a lower-risk portfolio for you based on when you want to buy a home.

Finally, consider establishing a budget for yourself. It isn’t an exciting task, but it’s a foundational part of your financial journey to purchasing a home. By building a budget which factors in how much you can save each month for a home, you can begin projecting when you’ll have enough funds for a down payment.

When it comes to home buying, there are many factors that are out of your control. But, you can still do things to make the home buying process easier, like improving your credit score and having a larger down payment. While it’s important to watch market trends and understand what’s going on, focusing on the noise can sometimes be overwhelming and counterproductive.

Putting yourself in the best buying position possible by improving your financial picture will help you get favorable terms on your mortgage and make home ownership a bit more affordable.

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