Financing Archives * Guthrie Group Homes Knoxville TN Real Estate

Home
Archives: Financing

Financing

Top 4 Factors to Consider When Choosing Your Mortgage

With home prices and rates still relatively high, securing a mortgage can feel daunting––even to the most experienced borrowers.

But don’t let that deter you: If other homebuyers’ experiences are any indication, odds are you’ll eventually find a home loan that works well for you.

In fact, most U.S. homeowners say they’re satisfied with the mortgage they received, according to a recent Bankrate survey.

The vast majority of the surveyed homeowners (69%) said they’d buy their current home again if they had a do-over.¹

The key to finding the right home loan for you is to look for one that you’ll feel comfortable with long after you’ve closed on your new property.

In addition to comparing term lengths and mortgage rates, also consider how the loan will fit your daily life and preferences.

For example, we recommend asking yourself questions such as: Are you a natural risk taker, or do you prefer firm plans and predictability?

Can you afford a bigger mortgage payment if interest rates increase, or are your anticipated home expenses already stretching your monthly budget?

To help you get started, we’ve rounded up four of the most important factors to consider when narrowing your list of potential mortgage options.

Please keep in mind that the info you are about to read may feel overwhelming. There is a lot of industry jargon and terms you may not be familiar with.

But, we’ve got you covered! Just give Libby a call with any questions. Remember she has 13 years of experience in the mortgage industry, so she will be able to explain everything to you. 🙆🏼‍♀️

Table of Contents

1. Your Credit Score

That three-digit number that credit scoring companies like VantageScore and FICO assign not only influences your interest rate, but it also helps determine the type of mortgage you can get.

To secure a conventional mortgage from a major bank or credit union, you’ll typically need a FICO score of at least 620. But some mortgage types require even higher credit scores.²

For example, to qualify for a U.S. Department of Agriculture (USDA) loan to buy a qualifying rural property, you’ll need a minimum FICO score of 640.

Or, if you’re seeking a supersized loan, such as a jumbo mortgage (which are home loans above $766,500 to $1,149,825, depending on where you buy the home), you may need a FICO score of at least 700 or more.²

You still have options, though, if your credit score is lower.

You may be able to get a Federal Housing Administration (FHA) loan with a 580 credit score if you have enough cash saved for at least a 3.5% down payment.

And if you have at least a 10% down payment, you may qualify even if your score is in the 500 to 579 range.

Alternatively, if you’re a military service member, veteran or spouse, you may be able to get a U.S. Department of Veterans Affairs (VA) loan with little or no money down with a credit score in the 580 to 620 range.^2,3

Some regional banks and credit unions may also be more flexible than others with minimum required credit scores.⁴

But if you can afford to wait, you may be better off paying down your debt first so your score can improve.

The interest you save with a more competitively priced loan could enable you to buy a more desirable home.

Your Takeaways

📱 Ask Libby or a mortgage professional what type of loan will suit your needs the best.

✨ Generally speaking, you’ll need a credit score of 620 to 740.

💸 Unless you are in the military, you’ll need a 10% to 20% down payment.

2. Your Income and Expenses

The amount of money you make, as well as how much you owe, will also influence your mortgage options.

Lenders like to see that you still have plenty of income left over after paying your expenses and generally prefer that you spend no more than 28% of your income on housing, or a maximum of 36% (which is the cap that federally-sponsored lenders Fannie Mae and Freddie Mac advise).⁵

A mortgage lender will also compare your expected income to the total amount of debt you’ll carry once you’ve bought the home.⁶

This is called your debt-to-income (DTI) ratio, and lenders consider it a key indicator of whether you can afford a particular mortgage.

In fact, research by NerdWallet found that a high DTI ratio is the most common reason mortgage applications get rejected.⁶

In addition to outstanding debts, lenders factor in other expenses unique to a home, such as property taxes, homeowners insurance, and homeowner association fees.

Your approval odds will be higher if you have a DTI ratio below 36%.⁷

But if you have great credit and ample cash, you may still be able to get a conventional loan with a DTI ratio in the 45% to 50% range.⁸

If not, you will likely need to look to other “non-conforming” loan types, such as government-backed mortgages.

With a FHA loan, for example, you may be able to get away with a DTI ratio of 43% to 57%, depending on your credit history and savings.

Similarly, if you qualify for a VA loan, you may be able to get one with a DTI ratio of 41% or more. USDA loans, on the other hand, are a bit stricter.

To get approved, your DTI ratio can’t be higher than 41% and your income must be below a certain threshold for your family type.⁶

Your Takeaways

📱 Ask Libby or a mortgage professional to help you discover what your debt-to-income (DTI) ratio is.

✨ Generally speaking, you can spend 28% of your income on housing, or a maximum of 36%.

💸 You can calculate your own DTI with this handy online calculator.

3. Your Expected Down Payment

The size of your down payment will also impact the type of mortgage you can get.

You don’t have to put down 20% to qualify for a conventional mortgage, but you will need a significant amount.

According to the National Association of Realtors, the median down payment amount in 2023 was 14%.

For younger buyers under the age of 33, it was 8%.⁹

In some cases, a larger down payment may also help you qualify for loans you might not otherwise.

For example, it can be tough to get a mortgage when you’re self-employed.

But some conventional lenders may be willing to work with you if you put down more than 20%.¹⁰

If your cash reserves are slim, then you may want to consider an FHA loan instead, which only requires 3.5% down.¹¹

Or, if you qualify for a USDA or VA loan, you may be able to skip the down payment altogether and buy your home with no money down except for a small funding fee.¹¹

Keep in mind, though, that a smaller down payment will likely mean a larger monthly payment.

Plus, you’ll not only pay more interest overall and be responsible for a larger principal, you’ll also need to take out mortgage insurance.

Conventional loans require private mortgage insurance (PMI) if your down payment is below 20%, while FHA loans always require insurance.¹²

How much you spend on mortgage insurance will also vary, depending on the size and type of loan you choose, as well as your credit score and other factors.

For example, FHA mortgage insurance premiums (MIPs) are generally more expensive than PMI and also require an upfront payment at closing on top of annual premiums.¹²

Insurance for adjustable rate mortgages (ARMs) also tends to be on the higher side.¹³

Your Takeaways

📱 Ask Libby or a mortgage professional to discuss your down payment options with you.

✨ Generally speaking, you’ll want to have 10% to 20% of the home price for a down payment.

💸 For a $500,000 home, a 10% down payment is $50,000 and a 20% down payment is $100,000.

4. Your Lifestyle and Risk Tolerance

In addition to your budget, one of the most important factors to consider when comparing mortgage options is your temperament.

For most Americans, a mortgage is a decades-long commitment. So it’s important to find one you can happily live with—and comfortably repay—for the long haul.

Most fixed rate mortgages, for example, are designed to last anywhere from 15 years to three decades or more, with 30-year mortgages being the most popular option.¹⁴

When you spread out your repayment over such a long period, monthly payment amounts are smaller, so you can slowly chip away at your debt at a leisurely pace. The catch is you also pay more in interest.

With a shorter mortgage term, by contrast, you pay less overall. But your monthly payment amount will also be much higher.¹⁵

For some homeowners, the long-term savings are worth it. But if keeping up with your mortgage requires significant lifestyle adjustments, then you may come to regret it.

Another way to lower your monthly payment in the short term is to choose an adjustable-rate mortgage (ARM) that offers a low fixed APR for a lengthy period (typically five, seven or 10 years) before changing to a variable rate.¹⁶

This can be an especially useful loan type if you only plan to stay in the home for a relatively short period.

But buyer beware: ARMs can be risky if you don’t plan ahead for a higher interest rate.¹

Your Takeaways

📱 Ask Libby about the pros and cons of each mortgage type.

✨ Generally speaking, you’ll be considering a 15 year mortgage, or the more common 30 year mortgage.

💸 The longer the term of the mortgage, the more you’ll pay in the long run, but the less you’ll pay each month.

The Bottom Line

Ken and Libby Guthrie, Guthrie Group Homes, Knoxville TN

Regardless of the loan you choose, it pays to shop around and carefully compare terms.

According to research by LendingTree, most homebuyers risk leaving money on the table by sticking with the first lender that they meet.¹⁸

Fortunately, we have a vetted list of mortgage professionals who can explain your options, answer your questions, and help you find the best loan to meet your needs.

We can also develop a custom plan for securing a great home that fits your budget. Reach out when you’re ready to get started.

The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.

Sources:

1. Bankrate – https://www.bankrate.com/mortgages/home-affordability-report/
2. Bankrate – https://www.bankrate.com/real-estate/what-credit-score-do-you-need-to-buy-a-house/
3. U.S. News & World Report – https://money.usnews.com/loans/mortgages/va-loans
4. Newsweek – https://www.newsweek.com/vault/mortgages/bank-vs-credit-union-for-mortgages/
5. Bloomberg – https://www.bloomberg.com/news/articles/2024-05-17/how-much-income-do-you-spend-budget-for-home-mortgage-in-us
6. NerdWallet – https://www.nerdwallet.com/article/mortgages/debt-income-ratio-mortgage
7. Bankrate – https://www.bankrate.com/mortgages/why-debt-to-income-matters-in-mortgages/
8. Bankrate – https://www.bankrate.com/mortgages/how-interest-rates-are-set/
9. National Association of Realtors – https://www.nar.realtor/sites/default/files/documents/2023-home-buyers-and-sellers-generational-trends-report-03-28-2023.pdf
10. Bankrate – https://www.bankrate.com/mortgages/self-employed-how-to-get-a-mortgage/
11. Bankrate – https://www.bankrate.com/mortgages/no-down-payment-mortgage/
12. CFPB – https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/
13. Bankrate – https://www.bankrate.com/mortgages/basics-of-private-mortgage-insurance-pmi/
14. MPA Magazine – https://www.mpamag.com/us/mortgage-industry/guides/the-7-most-popular-types-of-mortgage-loans-for-home-buyers/255499
15. Investopedia – https://www.investopedia.com/articles/personal-finance/042015/comparison-30year-vs-15year-mortgage.asp
16. NerdWallet – https://www.nerdwallet.com/article/mortgages/adjustable-rate-mortgage-arm
17. Federal Reserve Bank of St. Louis – https://www.stlouisfed.org/on-the-economy/2024/feb/which-households-prefer-arms-fixed-rate-mortgages
18. LendingTree – https://www.lendingtree.com/home/mortgage/shopping-around-survey/

Financing

What Recent Bank Failures Mean For Mortgage Rates (and You)

The recent collapse of Silicon Valley and Signature banks sent shockwaves through the financial sector, causing a ripple effect through the economy.

While the situation has been challenging, there’s also been a silver lining in real estate:

Mortgage rates are down.

Read on for a summary of the situation, as well as what it means for homebuyers, sellers, and owners like you.

Sincerely,

What’s Going On With Mortgage Rates

Historically, mortgage rates have followed the 10-year U.S. Treasury yield. A growing number of investors, concerned about instability in the banking sector, are now fleeing to the safety of these government-backed bonds. An increase in bond prices means lower yields—and lower mortgage rates.

But, this situation is rapidly evolving. On Wednesday, the U.S. Federal Reserve announced that it will hike its benchmark rate again as it continues its efforts to fight inflation, but this time by only a quarter percentage point. It also hinted that its series of rate hikes may be nearing an end.

Economists at the Mortgage Bankers Association (MBA) and National Association of Home Builders predict that this could put further downward pressure on mortgage rates.

“With this move from the Federal Reserve, MBA is holding to its forecast that mortgage rates are likely to trend down over the course of this year, which should provide support for the purchase market. The housing market was the first sector to slow as the result of tighter monetary policy and should be the first to benefit as policymakers slow—and ultimately stop—hiking rates,” said MBA SVP and Chief Economist Mike Fratantoni in a statement following the Fed’s announcement.

However, no one can predict with certainty how the market will react to the Fed’s policy moves—or how the banking crisis will play out and ultimately impact rates.

Bottomline: We could see some major volatility in mortgage rates in the coming months.

What All This Could Mean for You

BUYERS:

If you have considered buying a home, it’s important to be aware of the situation and to be prepared to lock in a low rate when the time is right. A lower mortgage rate could potentially save you hundreds of dollars on your monthly payment, so you can’t afford to miss out.

It’s also going to be crucial to work with knowledgeable real estate professionals (like us!) who are monitoring this situation closely as it continues to unfold. We can also refer you to a trusted mortgage professional, who can help you get pre-qualified for a home loan.

SELLERS:

A further dip in mortgage rates could bring more buyers to the market. These buyers may want to act quickly in case rates rise again.

If you’ve been on the fence about selling your home, now may be the perfect time. We can help you prep your home and get it listed quickly to take advantage of a possible increase in demand.

HOMEOWNERS:

Depending on the terms of your current mortgage, you could save a bundle by refinancing if rates fall significantly. Let us connect you with a mortgage professional to discuss your options.

What Steps You Should Take Now

You don’t want to miss out on this potential window of opportunity! Leave us a comment on this post or give us a call today to schedule a free consultation so you can be prepared.

And as always, don’t hesitate to reach out with any questions about this or other real estate issues. We would love to hear from you!

Call Libby at 📲 865-364-0200 or email her at 📧 [email protected]

Financing

8 Strategies to Secure a Lower Mortgage Rate

Securing a Lower Mortgage Rate can save you thousands of dollars over the life of your home loan. Here are 8 simple ways to do so.

Mortgage rates have been on a roller coaster ride this year, rising and falling amid inflationary pressures and economic uncertainty. And even the experts are divided when it comes to predicting where rates are headed next.¹

This climate has been unsettling for some homebuyers and sellers. However, with proper planning, you can work toward qualifying for the best mortgage rates available today – and open up the possibility of refinancing at a lower rate in the future.

How does a lower mortgage rate save you money? According to Trading Economics, the average new mortgage size in the United States is currently around $410,000.² Let’s compare a 5.0% versus a 6.0% fixed interest rate on that amount over a 30-year term.

Mortgage Rate *(30-year fixed)*	Monthly Payment on $410,000 Loan *(excludes taxes, insurance, etc.)*	Difference in Monthly Payment	Total Interest Over 30 Years	Difference in Interest
5.0%	$2,200.97		$382,348.72
6.0%	$2,458.16	+ $257.19	$474,936.58	+ $92,587.86

With a 5% rate, your monthly payments would be about $2,201. At 6%, those payments would jump to $2,458, or around $257 more. That adds up to a difference of almost $92,600 over the lifetime of the loan. In other words, shaving off just one percentage point on your mortgage could put nearly $100K in your pocket over time.

So, how can you improve your chances of securing a low mortgage rate? Try these eight strategies:

Raise your Credit Score

Borrowers with higher credit scores are viewed as “less risky” to lenders, so they are offered lower interest rates. A good credit score typically starts at 690 and can move up into the 800s.³ If you don’t know your score, check with your bank or credit card company to see if they offer free access. If not, there are a plethora of both free and paid credit monitoring services you can utilize.

If your credit score is low, you can take steps to improve it, including:⁴

Correct any errors on your credit reports, which can bring down your score. You can access reports for free by visiting AnnualCreditReport.com.

Pay down revolving debt. This includes credit card balances and home equity lines of credit.
Keep your total credit utilization to under 30%, which shows creditors that you are a responsible borrower.
Avoid closing old credit card accounts in good standing. It could lower your score by shortening your credit history and shrinking your total available credit.
Make all future payments on time. Payment history is a primary factor in determining your credit score, so make it a priority.
Limit your credit applications to avoid having your score dinged by too many inquiries. If you’re shopping around for a car loan or mortgage, minimize the impact by limiting your applications to a short period, usually 14 to 45 days.⁵

Over time, you should start to see your credit score climb — which will help you qualify for a lower mortgage rate.

Keep Steady Employment

If you are preparing to purchase a home, it might not be the best time to make a major career change. Unfortunately, frequent job moves or gaps in your résumé could hurt your borrower eligibility.

When you apply for a mortgage, lenders will typically review your employment and income over the past 24 months.⁵ If you’ve earned a steady paycheck, you could qualify for a better interest rate. A stable employment history gives lenders more confidence in your ability to repay the loan.

That doesn’t mean a job change will automatically disqualify you from purchasing a home. But certain moves, like switching from W-2 to 1099 (independent contractor) income, could throw a wrench in your home buying plans.⁶

Lower Your Debt-to-Income Ratios

Even with a high credit score and a great job, lenders will be concerned if your debt payments are consuming too much of your income. That’s where your debt-to-income (DTI) ratios will come into play.

There are two types of DTI ratios:⁷

Front-end ratio — What percentage of your gross monthly income will go towards covering housing expenses (mortgage, taxes, insurance, and dues or association fees)?
Back-end ratio — What percentage of your gross monthly income will go towards covering ALL debt obligations (housing expenses, credit cards, student loans, and other debt)?

What’s considered a good DTI ratio? For better rates, lenders typically want to see a front-end DTI ratio that’s no higher than 28% and a back-end ratio that’s 36% or less.⁷

If your DTI ratios are higher, you can take steps to lower them, like purchasing a less expensive home or increasing your down payment. Your back-end ratio can also be decreased by paying down your existing debt. A bump in your monthly income will also bring down your DTI ratios.

Increase Your Down Payment

Minimum down payment requirements vary by loan type. But, in some cases, you can qualify for a lower mortgage rate if you make a larger down payment.⁸

Why do lenders care about your down payment size? Because borrowers with significant equity in their homes are less likely to default on their mortgages. That’s why conventional lenders often require borrowers to purchase private mortgage insurance (PMI) if they put down less than 20%.

A larger down payment will also lower your overall borrowing costs and decrease your monthly mortgage payment since you’ll be taking out a smaller loan. Just be sure to keep enough cash on hand to cover closing costs, moving expenses, and any furniture or other items you’ll need to get settled into your new space.

Compare Loan Types

All mortgages are not created equal. The loan type you choose could save (or cost) you money depending on your qualifications and circumstances.

For example, here are several common loan types available in the U.S. today:⁹

Conventional — These offer lower mortgage rates but have more stringent credit and down payment requirements than some other types.
FHA — Backed by the government, these loans are easier to qualify for but often charge a higher interest rate.
Specialty — Certain specialty loans, like VA or USDA loans, might be available if you meet specific criteria.
Jumbo — Mortgages that exceed the local conforming loan limit are subject to stricter requirements and may have higher interest rates and fees.¹⁰

When considering loan type, you’ll also want to weigh the pros and cons of a fixed-rate versus variable-rate mortgage:¹¹

Fixed-rate — With a fixed-rate mortgage, you’re guaranteed to keep the same interest rate for the entire life of the loan. Traditionally, these have been the most popular type of mortgage in the U.S. because they offer stability and predictability.
Adjustable rate — Adjustable-rate mortgages, or ARMs, have a lower introductory interest rate than fixed-rate mortgages, but the rate can rise after a set period of time — typically 3 to 10 years.

According to the Mortgage Bankers Association, 10% of American homebuyers are now selecting ARMs, up from just 4% at the start of this year.¹² An ARM might be a good option if you plan to sell your home before the rate resets. However, life is unpredictable, so it’s important to weigh the benefits and risks involved.

Shorten Your Mortgage Term

A mortgage term is the length of time your mortgage agreement is in effect. The terms are typically 15, 20, or 30 years.¹³ Although the majority of homebuyers choose 30-year terms, if your goal is to minimize the amount you pay in interest, you should crunch the numbers on a 15-year or 20-year mortgage.

With shorter loan terms, the risk of default is less, so lenders typically offer lower interest rates.¹³ However, it’s important to note that even though you’ll pay less interest, your mortgage payment will be higher each month, since you’ll be making fewer total payments. So before you agree to a shorter term, make sure you have enough room in your budget to comfortably afford the larger payment.

Get Quotes from Multiple Lenders

When shopping for a mortgage, be sure to solicit quotes from several different lenders and lender types to compare the interest rates and fees. Depending upon your situation, you could find that one institution offers a better deal for the type of loan and term length you want.

Some borrowers choose to work with a mortgage broker. Like an insurance broker, they can help you gather quotes and find the best rate. However, if you use a broker, make sure you understand how they are compensated and contact more than one so you can compare their recommendations and fees.¹⁴

Don’t forget that we can be a valuable resource in finding a lender, especially if you are new to the home-buying process. After a consultation, we can discuss your financing needs and connect you with loan officers or brokers best suited for your situation.

Consider Paying Mortgage Points

Even if you score a great interest rate on your mortgage, you can lower it even further by paying for points. When you buy mortgage points — also known as discount points — you essentially pay your lender an upfront fee in exchange for a lower interest rate. The cost to purchase a point is 1% of your mortgage amount. For each point you buy, your mortgage rate will decrease by a set amount, typically 0.25%.¹⁵You’ll need upfront cash to pay for the points, but you can more than make up for the cost in interest savings over time.

However, it only makes sense to buy mortgage points if you plan to stay in the home long enough to recoup the cost. You can determine the breakeven point or the period of time you’d need to keep the mortgage to make up for the fee, by dividing the cost by the amount saved each month.¹⁵ This can help you determine whether or not mortgage points would be a good investment for you.

Getting Started

Unfortunately, the rock-bottom mortgage rates we saw during the height of the pandemic are behind us. However, today’s 30-year fixed rates still fall beneath the historical average of around 8% — and are well below the all-time peak of 18.45% in 1981.^{16, 17}

And although higher mortgage rates have made it more expensive to finance a home purchase, they have also eliminated some of the competition from the market. Consequently, today’s buyers are finding more homes to choose from, fewer bidding wars, and more sellers willing to negotiate or offer incentives such as cash toward closing costs or mortgage points.

If you’re ready and able to buy a home, there’s no reason that concerns about mortgage rates should sideline your plans. The reality is that many economists predict home prices to continue climbing.¹⁸ So you may be better off buying today at a slightly higher rate than waiting and paying more for a home a few years from now. You can always refinance if mortgage rates go down, but you can’t make up for the lost years of equity growth and appreciation.

If you have questions or would like more information about buying or selling a home, reach out to schedule a free consultation. We’d love to help you weigh your options, navigate this shifting market, and reach your real estate goals!

Sources:

Download your free copy of this article – 8 Strategies to Secure a Lower Mortgage Rate

Page 1 of 8

First

Last