7 Ways You Can Beat High Interest Rates As A Brooklyn Homebuyer

Brooklyn hombuyer surprised by high interest rate

As a Brooklyn homebuyer, you know it is no secret that mortgage interest rates have been rising through 2022. Although that sounds like bad news, there are still ways you can lower your interest rate on your new home.

Although mortgage rates have doubled since the beginning of the year, they are nowhere near the historical high of October 1981, when they peaked at 18.45%. However, that may not be comforting to you if you could not take advantage of the historically low rates.

Still, homeownership typically wins out over renting in the long term. If you are not sure whether you should rent or buy, take some time to read our previous blog post, “Should You Buy Or Rent In The Brooklyn Real Estate Market?”

If you are now in the market to buy a home, there are some things you can do to ensure you receive the best rate possible. 

Improve Your Credit

Your credit score significantly affects your ability to finance a home and the interest rate a lender will offer you. A strong credit score gives the lender greater confidence that you are a reasonable risk and that you use your credit wisely. The better your credit score, the more favorable the loan terms you will receive.

The number one thing you can do is to make your payments on time and in full each month. Credit history makes up approximately 35% of your credit score. This CNBC article discusses all the factors involved in calculating your credit score. 

The credit utilization ratio is another factor that can affect your credit score. Essentially, you only want to use some of the credit available at any time. 

Keeping older credit accounts open can also boost your credit score. On the other hand, having too many credit inquiries within a limited time frame can negatively affect your score. 

It is wise to monitor your credit score and handle any issues that may arise as soon as possible. There are plenty of apps available that can help you monitor your credit.

Mortgage Broker VS Bank

Mortgage brokers source loans from a variety of lenders. They are the go-between for financial institutions and homebuyers. The broker will collect and verify all the information required by the borrower to complete the home purchase and work with both the borrower and the lender.

They may be able to find a better rate than working directly with a bank, although a borrower can certainly work directly with a bank. A mortgage broker can discover various loan options for a borrower, saving the legwork needed.

A Brooklyn homebuyer with some credit challenges may find more flexible lenders through a mortgage broker.

Be careful when you are evaluating the offers a mortgage broker provides you. Depending on their sources, they may not be able to offer a better deal than working directly with a bank. Some lenders will not work with mortgage brokers and may be able to provide you with a better deal. 

Shop Lenders

With the rise in interest rates, the number of people buying and refinancing has decreased. As a result, lenders are more likely to compete for your loan now than they were a year ago. 

When comparing lenders, remember that you are comparing interest rates, the lender’s fees, and the amount of cash you need. The fees are origination fees, points, mortgage insurance premiums, and 3rd party fees. First, ask for an estimate of the monthly payment and total closing costs. Then, compare each lender’s estimate. 

Finding the right mortgage is as important as finding the right home. Mortgages are a long-term commitment, and leaving money on the table is never desirable. Work with reputable people that you trust.

Purchase A More Affordable Home

The interest rate affects the maximum amount you can borrow for your mortgage. The lender you choose will calculate your total monthly payment for the loan principal, interest, taxes, and insurance. Therefore, the higher the interest rate, the less principal you can afford. As a result, you may have to lower the price range of the homes you want. A starter home or fixer-upper is a good option because you will begin to increase equity in your investment. Later, you can roll that equity into a larger home if needed.

Make A Larger Downpayment

A larger downpayment can make a difference in the price of a home you can afford and the terms of your mortgage. In addition, your interest rate may be lower with a larger downpayment which saves on the amount of money you pay in interest over the life of the loan. 

Lenders require private mortgage insurance when the borrower’s downpayment is less than 20%. Once the borrower reaches 20% equity in the home, they can cancel their private mortgage insurance.

When saving for a home, you need to consider the downpayment, closing costs, and an emergency fund for repairs after you close your house. If you do not have an emergency fund when you purchase a home, you may be in a bad financial situation should anything go wrong in the house.

You will also need to consider the time you expect to live in your new home. A larger downpayment is more beneficial for the long term. However, the larger downpayment may not make sense if you do not plan to stay in the house for long.

Buy Down Your Rate With Points

Buying down your mortgage interest rate should be carefully examined to see if it makes sense for you. You pay a one-time fee upfront for discount points or mortgage points. Each point costs approximately 1% of the loan amount. Generally, each point reduces the rate by .25%. 

For example, a Brooklyn homebuyer needs to apply for a mortgage of $300,000 and purchase one discount point at the cost of $3,000. Say the going interest rate is 6.5%; after buying that one discount point, they would pay 6.25% interest on the loan.

Sometimes a builder or seller will offer to pay discount points to buy down your mortgage rate. However, suppose you are considering buying down your mortgage interest rate. In that case, you must remember that you have to have enough cash for a downpayment, closing costs including discount points, and reserve savings.

Analyze the breakeven point or the amount of time it will take you to recoup the cost of the discount points needed to lower your interest rate. Simply divide the cost of the discount points by the amount you will save each month at the lower rate. If you think there is a chance you would be selling the home or refinance it before the breakeven point, it may not make sense for you to buy down the interest rate.

Assume An Existing Mortgage

A Brooklyn homebuyer takes over a home seller’s loan when they assume an existing mortgage. Not all types of mortgage loans are assumable. The buyer must qualify for the mortgage. A cash downpayment is needed to cover the difference between the sales price and mortgage balance. 

Assumable mortgages are a good option for a Brooklyn homebuyer if the original loan’s interest rate is less than the current interest rate for a new loan. You can save money long-term because you are borrowing less over a shorter period than with a new mortgage. 

FHA, VA, and USDA loans are usually assumable, but conventional loans are not. In addition, government-backed loans regulate the closing cost on assumed mortgages, which may save you money.

Qualifying for an assumable loan is similar to qualifying for a new mortgage. You must complete a loan application and provide all the required supporting documentation. A mortgage underwriter will pull your credit and verify your information to determine if you meet the credit requirements. They will also need to confirm that you have adequate funds to pay for the closing costs and downpayment.

As a Brooklyn homebuyer, you must determine which options work best for you. Do your homework, and work with professionals who understand the pros and cons of each to get the best advice. You can not control the interest rates, but you may be able to find a strategy that works in your favor.
Contact me, Charles D’Alessandro, your Brooklyn Real Estate Agent with Fillmore Real Estate, if you are considering buying a home. As a Brooklyn real estate agent with over 35 years of experience, I know the local area, market trends, and available resources. Reach me by phone at (718) 253-9500 ext. 1901 or by email at [email protected].

Charles D'Allesandro

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