The COVID-19 pandemic re-energized the importance of home ownership as buyers began looking for places to spread out while social distancing.
Add to that the historically low interest rates increasing the affordability of borrowing, and before long demand had outstripped supply.
Despite the fierce competition, real estate agents say there are still ways for buyers to stand out as they navigate their search and make offers on a new home.
How do I to get the best interest rate?
You want to shop around.
The Federal Housing Administration recommends getting offers from a wide range of lenders and different lending institutions like mortgage lenders, banks or credit unions. You can also use a mortgage broker to do the heavy lifting for you.
If you can afford a higher down payment, some lenders will give you a lower interest rate.
Real estate agents will also work with you to help you find the right mortgage lender to give you the best rate and the best loan terms to help you get into your dream home.
Always get pre-approval
Latoya Williams has been a Realtor in Fort Worth for 12-years. She always has her clients get all their financial paperwork in order before they start their search for a home.
“That way all you have to do is literally plug in a house,” Williams said.
Having pre-approval helps you understand how much house you can afford, which can help guide your home search.
It also makes you to be more attractive to sellers by speeding up the closing process. This is especially important when you’re competing against all cash buyers who don’t have to go through the lending process.
Appraisal Waiver
Appraisal waivers can be an option for conventional mortgages if you meet certain qualifications.
You typically have to put down at least 20% in a down payment, and your lender needs to use an automated underwriting system from either Fannie Mae or Freddie Mac.
An experienced real estate agent can guide you through the process of getting an appraisal waiver, said Patty Williamson, a Realtor in Fort Worth.
These waivers can speed up the time it takes to close on a house, which can make buyers more attractive to sellers, she said.
The downside of an appraisal waiver is you may pay more than your house is worth.
An in-person appraiser might find problems with your home’s foundation or old appliances that need updating. This can be a problem when it comes time to sell. However you can fix these problems if you’re going to be in the home for a while.
Fixed versus adjustable rate mortgage
Adjustable rate mortgages typically have lower interest rates than fixed rate mortgages, making them more affordable for some home buyers.
However, that rate is only locked in a defined period, which is usually five or 10 years.
During the 2008 financial crisis, a lot of home owners lost their homes when they could no longer afford the payment when their rate adjusted.
However, you can refinance your loan before the rate changes, said Shelby Kimball, a Fort Worth Realtor. This allows you to keep a lower rate with predictable monthly payments
With a fixed rate mortgage, your monthly payments don’t change. The one exception is your property taxes, which could increase your monthly payments if your property value increases or the tax rate goes up.
Different types of loans
Government Loans: These are loans insured by either the Federal Housing Administration, the Department of Veterans Affairs or the U.S. Department of Agriculture.
The benefit of these loans is they allow you to put down either a low or in some cases no down payment in order to get approved.
They do come with some strings attached.
USDA loans require you to be in a designated rural service area.
That puts most of Fort Worth and Tarrant county out of reach, but parts of Johnson County, like Godley, qualify for this kind of loan.
Most loans require you to pay mortgage insurance if you put down less than a 10% down payment, however, unlike conventional mortgages, FHA loans require you to keep paying insurance even after you’ve paid off 20% of your home’s original value.
FHA loans also have inspection requirements to make sure the home is structurally sound and livable.
While it’s important to live in a structurally sound home, some sellers can be turned off by this process as the inspection draw out the closing process.
Conventional mortgage: These loans are not insured by the government, and typically require a higher down payment and credit score.
The advantage is they don’t have as many requirements as government-backed loans and can make you eligible for an appraisal waiver when buying a home.
Conventional mortgages also allow borrowers to stop paying mortgage insurance once they’ve paid up to 20% of their home’s purchase price.
For example, if you bought a $350,000 home, but could only afford to put 10% in a down payment, you would pay mortgage insurance until you’d built up 20% equity in your home.
That means your down payment and the principal you’ve paid on your loan are 20% of the purchase price.
15-year vs. 30-year terms: In a nutshell, you’re going to pay more monthly with a 15-year term mortgage than you would with a 30-year.
If you can afford that higher monthly payment, though, you can pay off your home much quicker. This means you’ll pay less interest and typically save by having a lower interest rate.
The average interest rate for a 15-year mortgage in mid-June was 4.81% compared to 5.78% for a 30-year mortgage.
For a $350,000 mortgage, a 15-year term will cost you an additional $614 per month, but will save you $245,718 in interest compared to a 30-year term.
Buying points
Buying points is a way to get a lower interest rate on your mortgage. One point typically gets you a 0.25% discount on your interest rate.
For example, if you bought one point on a mortgage with a 5.78% interest rate, your new interest rate for the life of your loan would be 5.53%.
The cost of one point is 1% of the amount you’re borrowing, so for a $350,000 loan it would cost $3,500.
Having a lower interest rate means you’ll pay less each month on your mortgage, however, it’s important to consider how long it will take to break even on what you paid for the point.
The monthly payment on a 30-year fixed rate $350,000 mortgage with a 5.78% interest rate is $2,049. It’s $1,994 for the same mortgage with a 5.53% interest rate, meaning you’re saving $55 a month.
It will take roughly 5.3 years to break even after paying for the discounted interest rate, so if you’re going to be in your home longer than that, this might make sense for you.
If you’re going to be there for less time or you’re not sure how long you’ll be living in your home, it might not make sense for you to buy points.
