How to negotiate a mortgage in Minnesota when rates are rising fast

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This spring, homebuyers are facing a double whammy: Mortgage rates have hit their highest level in more than a decade and house prices are now at record highs.

The result is that monthly housing payments have skyrocketed compared to just a few months ago.

Wondering how to shop for a home at a time of rapidly changing rates? We asked several Twin Cities housing experts for advice for homebuyers.

What you must remember

The average rate for a 30-year fixed-rate mortgage was 5.27%, according to the latest Freddie Mac weekly survey. Although this is the highest rate in over a decade, it is still a relatively low rate. In recent decades, the 30-year average rate was around 8%.

Although mortgage rates have risen faster than expected, they are not expected to fall anytime soon. In fact, there is still upward pressure on rates in the coming months, so rates are expected to rise slightly.

If you’ve put off buying a home because you’re worried there aren’t enough homes on the market, don’t despair. There has recently been a spike in new listings and a drop in pending sales, suggesting an uptick in the number of homes that will be for sale in the coming months. With borrowing costs rising, buyers should be less inclined to make the kinds of outlandish and excessive offers that were common last fall and earlier this year.

The very first thing you should do

One of the best ways to get the lowest possible mortgage rate is to ensure you have the highest possible credit score. If you have bad credit, lenders will charge you a higher rate because you’re more likely to miss a payment or default on your mortgage.

Talk to a property or financial advisor who can help you build a credit history and determine the best and fastest way to improve your credit score. It’s true whether you’re buying your first home or your last.

The Twin Cities has an extensive network of homebuyer programs that provide advisory services to buyers, including PRG Inc., which not only provides pre-purchase advice, but also access to programs down payment assistance and other home buying programs.

Jeff Wills, program manager for PRG, said buyers often start their home search by first talking with a real estate agent or mortgage advisor. These professionals only get paid if you buy a home, so he recommends speaking with a nonprofit advisor first to ensure you get unbiased advice.

“We are the only ones who do not benefit from your decisions,” he said. “We don’t charge anything and we’re not here to make money.”

Most nonprofit property counseling programs are free. It is important that they are certified by HUD. These nonprofit organizations, including the Minnesota Homeownership Center, can also provide a list of experienced lenders.

Strategies for getting the best rate

In times of rising mortgage rates, buyers tend to focus on a variety of alternative mortgages and financing techniques. This includes adjustable rate mortgages, deed contracts and assumable mortgages. But in today’s rapidly rising rate environment, these watches aren’t likely to provide relief to most buyers.

Lori Day, senior vice president and director of mortgages at Alerus Financial, said finding a highly experienced lending office and real estate agent is more important than ever. Buyers should interview multiple agents and loan officers. “You’re paying virtually the same amount for someone who’s been in the business for 20 years and someone who came into the business six months ago,” Day said.

Buyers should determine if they will qualify for a government-backed FHA mortgage or a conventional mortgage. Conventional requires a slightly higher credit rating and tends to come with a slightly higher interest rate. But it allows for a slightly lower down payment.

Another key consideration is whether they can avoid paying for private mortgage insurance, which can cost hundreds of dollars each month. Most conventional loans require borrowers to pay mortgage insurance if their down payment is less than 20%, while FHA loans now require mortgage insurance regardless of the amount of the down payment. Yes, it’s confusing. Just know that making the right decision can save you hundreds of dollars every month.

Buyers can ask their real estate agents to advise them not only on how much to offer, but also on other important terms. An example of a choice you will face is asking your seller to help pay for closing costs.

Day also offers this tip: shop around for a mortgage. Since the true cost of a mortgage is determined by more than the rate itself, avoid loan officers who only promise the lowest rate, which isn’t always the best deal.

Instead, ask the loan officer how many loans he’s made and how long he’s been in the business. And ask them for detailed loan information using the exact same scenario.

The key elements are the loan amount, the down payment amount and the closing costs. Ask them to quote the rate without discount points, which represents the mortgage in its purest form without the integration of the initial costs.

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