Top mortgage do’s and dont’s are especially important in 2017. Last
December the Federal Reserve raised its key interest rate by 0.25% –
marking only the second rate increase in a decade (the first time was in
December 2015).
While a rate hike doesn’t always lead to higher
mortgage rates, this particular hike comes at a time when rates on
10-year U.S. Treasury notes are rising. As the 10-year note yield and
mortgage rates tend to be correlated – and experts anticipate that the
yield will hit at least 3% by the end of the year (up from 2.42% today) –
we can expect mortgage rates to rise in 2017. With that in mind, we
thought it made sense to look at a few do’s and don’ts to remember if
you’re planning on getting a mortgage in 2017. (For more, see Mortgage
Basics: How to Get a Mortgage.)
2017’s Top Mortgage Do’s and Don’ts: Do Check Your Credit Report
Lenders review your credit report to determine if you
qualify for a loan and at what rate. It’s free to check: By law you are
entitled to one free credit report every year from each of the “big
three” credit rating agencies: Equifax, Experian and TransUnion. Take a
close look at your credit report to make sure it’s accurate, and if
there are mistakes, take steps to fix them. In particular, watch out for
things such as debts that have already been paid, information that
isn’t yours (due to a mistake or identity theft), data from a former
spouse that shouldn’t be there anymore, out-of-date information and
incorrect notations for closed accounts.
Do Improve Your Credit Score
In general the higher your credit score, the better
mortgage you’ll get, so it pays to do what you can to achieve the
highest score possible. The most common credit score is the FICO score,
which many financial institutions provide for free to their customers
each month; otherwise, you can purchase your FICO score from one of the
“big three” credit rating agencies. To improve your credit score, pay
down debt, set up payment reminders to pay your bills on time, keep your
credit card and revolving credit balances low and reduce the amount of
debt you owe (e.g., stop using your credit cards).
Do Lower Your Debt-to-Income Ratio
Lenders look at your debt-to-income ratio to measure
your ability to manage your monthly payments and to determine how much
house you can afford. Lenders like to see debt-to-income ratios lower
than 36%, with no more than 28% of that debt going toward mortgage
payments (this is called the “front-end ratio”). The stronger these
ratios, the better your mortgage rate.
There are two ways to lower your debt-to-income ratio so you get a better mortgage rate (and neither is easy):
Reduce Your Monthly Recurring Debt – Stop spending
money on anything but the most urgent purchases.
Increase Your Gross Monthly Income – Get a second job, work extra hours,
take on more responsibility to get a pay increase or complete course
work/licensing to increase your earning potential.
Don’t Take on Too Much House
Following the Great
Recession, lenders are less likely to qualify you for loans that exceed
your ability to pay. Still, it’s worth considering that just because
you qualify for X amount doesn’t mean that you have to spend that much
on a home.
A conservative approach is to spend no more than 30%
of your take-home pay on housing costs, which includes your mortgage,
property taxes, homeowner’s insurance and homeowner’s association dues –
plus maintenance costs if you really want to make sure you’re looking
in the right price range. When shopping for homes, decide what’s more
important: having that more expensive home or having a little extra
wiggle room in your budget each month – and remember that’s a 30-year
commitment.
Don’t Count on Refinancing to Lower Your Interest Rate
Mortgage rates are expected to climb during 2017, so
it might not be the year to refinance if you’re aiming to lower your
rates – depending, of course, on your current rate. That said, you may
be able to save money by shortening your loan term – for example, moving
from a 30-year fixed-rate mortgage to a 15-year one with a better rate –
or through cash-out refinancing, in which your new mortgage amount is
greater than the existing one. This allows you to tap into your home
equity to pay down other debts. Even though your monthly payment will
rise, you could end up saving money by paying off higher-interest debt,
such as your car loan, student loans and/or credit cards.
Before doing any type of refi, it’s important to
crunch the numbers to ensure that it makes financial sense. (For more,
see When (and When Not) to Refinance Your Mortgage.)
The Bottom Line
Homebuyers can expect to see rising mortgage rates in 2017. Even a
small change in rates can make a big difference in monthly payments,
the amount of interest paid over the course of the loan and the size of
the loan (and house) for which you’ll qualify. If you have a $200,000
30-year fixed-rate mortgage at 4%, for example, your monthly payment
would be $954.83, and you’d pay $143,739.01 in total interest. Bump the
rate up by 0.5% (for a total of 4.5%), and you’d be looking at a monthly
payment of $1,013.37, and your total interest paid would be $164,813.42
(that’s about $2 more per day – for 30 years).
Given the above, 2017 is a good time to work on
improving your credit score, credit history and debt-to-income ratio, so
you can qualify for the best rate available. And, of course, don’t take
on more house than you can comfortably afford.
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