June 5, 2020
Financial magazines reported mortgage rates falling below three percent; these reports in early June point to the numbers we’re seeing both for conventional mortgages (depending on the term of the loan) as well as government-backed loans like FHA home loans.
Why have mortgage rates continued to fall to historic lows? Market volatility, daily ups and downs over COVID-19, civil unrest, and trade war concerns have contributed to these low rates.
But the volatility associated with today’s mortgage loan market makes it hard to predict whether these rates will be with us tomorrow, next week, or ever again.
Fortunately, borrowers and lenders use a toll called a mortgage rate lock commitment to protect the loan applicant from future changes. How does it work?
When you make an offer on a home and want to commit to the mortgage, you reach the time to make an agreement with the bank to lock in the interest rate for a specific amount of time to prevent the borrower from getting burned by a sudden shift to a higher rate.
The agreement is something you may be tempted to delay if you think rates might go lower before you make the commitment.
Borrowers have the option to “lock” the interest rate in with that agreement, or to “float” and hold off on making that interest rate commitment in hopes that rates might drop even lower.
Locking and floating carry their share of risks; those who lock only risk missing out on a beneficial rate change; but those who float may find rates have moved higher in the meantime and they may have to settle for a higher interest rate. Timing is everything.
A borrower’s credit score is instrumental in getting the lowest rate possible. According to a Money Magazine report in June, 2020, “Generally, borrowers need a FICO score of 740 or higher to qualify for the lowest mortgage rates on a conventional loan”.
Interest rates you see advertised online, especially the ones saying “lowest ever” will be accessible to those who have good credit. Those with less-than-ideal credit will have a harder time accessing those rates.
Before any new loan application, you can do work on your own credit to improve your FICO scores; you can begin by reading and monitoring the contents of your credit report. You should make a budget to start lowering your debt load and make plans to establish 12 months or more of on-time payment for all financial obligations.
If you need a lower interest rate and can afford higher payments, a shorter loan term can earn you a lower rate and a faster payoff of your mortgage.
A 15-year FHA mortgage will have higher monthly payments, but a lower interest rate than an FHA’ 30-year mortgage and the short loan term provides more savings (of interest payments over time).
Talk to a loan officer today about your options to buy or refinance into a lower interest rate. The incredible lows we see in the housing market at press time are not guaranteed to remain, and those who are ready to commit should definitely know what they could be saving with today’s rates.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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