9 factors that are more important than your mortgage rate
September 3, 2019
Locking in a low interest rate for your home mortgage is great, but it’s not the most important thing to concern yourself with when shopping for a mortgage. Even a higher interest rate can be refinanced down the line, but these nine factors can cost you thousands or even prevent your loan approval from happening altogether:
1. Job security
Before you even think about house shopping you need to have your job security established and well documented. Generally, lenders calculate your average income based on your past 24 months of employment. Lenders will want an employment verification from your employer that outlines your compensation with your most recent pay stub and a role change letter if you’ve had a recent promotion. If you’ve had long gaps of unemployment within the last two years, you might not be the best candidate for a loan.
2. Your down payment
The traditional down payment rule of thumb requires the borrower to bring 20% to the table, but through some special program buyers may be able to get away with down payments as low as 3%. One benefit of providing 20% at closing is the absence of private mortgage insurance (PMI) which requires buyers to pay an additional fee until they’ve built up 20% in equity. Plus, depending on the term of your mortgage, putting more money down generally means a lower monthly payment as well.
3. The housing markets
When interest rates are low, housing prices are usually higher. Even if interest rates skyrocket now, it’s safe to say that one day they will be low again and you can refinance. It may be better, financially speaking, to pay less for a house with a higher interest rate knowing that you can always refinance when rates inevitably drop again.
4. Personal credit history
The best interest rates go to those with the best credit scores. You can order a free credit report once a year from each of the major credit reporting agencies (Equifax, Experian and TransUnion) through AnnualCreditReport.com. It’s a good idea to order your free report so you can correct any errors before you start your mortgage application process. You should also pay off as much debt as possible to improve your debt to income ratio.
5. Property taxes
Homebuyers should research property taxes before any offer is made, so they won’t be caught off-guard by rate hikes. Contact the local assessor’s office or search the property on the assessor website to research the current and past tax rates of the home. Zillow offers a fairly accurate tax history, but you will need to do more digging if the property is a new build. An estimate of the tax or a copy of the current owner’s tax bill may be helpful, but those sources might not reflect a scheduled post-sale reassessment that could result in a big tax increase.
6. HOA fees
If you’re planning to purchase a property subject to HOA fees, be sure to ask about maximum fees and which factors determine rate hikes and decreases. In some neighborhoods if there are properties that sit open, HOA fees will go up with fewer homeowners to share the cost. Make sure these fees are factored into your budget of what you can afford.
7. Being prepared for home ownership
You’ve got the cash; the market is looking good and your debt-to-income ratio is in check — you’re thinking now is the time to buy. But is it? Owning a home is more than just being financially ready on paper. Make sure you’re ready to settle down and you’re fully prepared to deal with the inconveniences and extra costs that can pop up. New appliances, leaky pipes, pest control, home updates and those yearly air conditioner tune ups — it never ends. Make sure you’re ready to deal with all the behind-the-scenes things HGTV doesn’t talk about.
Interest rates matter less if you can easily afford your payments and plan to live in your home for five years or less. If that’s the plan — make sure you’re buying a home in a desirable neighborhood with a high resell potential. Pay attention to the neighborhood’s home values, not national market numbers.
9. Planned length of time in the home
Calculate how long you would need to live in the home before it becomes more affordable than renting — in most housing markets, it takes about 10 years of homeownership before it gets to that point. If you don’t plan to stay in the home for at least 10 years, you might consider renting.
The bottom line
Instead of rate shopping — you should put more focus on working with a lender who can help you understand these nine factors in full detail, and ultimately someone you can trust. At Bank Iowa, our team of mortgage experts use local market knowledge to help you decide which mortgage option is best and most affordable option for you.