January 17th, 2014 3:11 PM by Dana Bain
In late December, the Federal Reserve announced that it will be cutting bond buying by $10 billion a month. This represents a big change in the mortgage industry, as the government had previously been purchasing $85 billion in bonds each month (quantitative easing) in order to lower interest rates after the housing crash. The tapering is a result of improved economic conditions and low unemployment statistics.
Starting January 1, the government has been cutting back on two types of bond purchases: treasuries and mortgage-backed securities. Therefore, interest rates have been on a slow, gradual rise and are expected to reach highs by the end of the year.
So, what are some ways you can secure low mortgage interest rates in the face of Fed tapering?
The stimulus was made to reduce interest rates, so naturally, the federal tapering will increase interest rates. If you can afford to do so, it’s within your best interest to buy a home within three to six months so that you can benefit from the lowest rates possible.
Your lender will quote your rate as a direct result of how much of a risk you present to them. Risks that lenders look at include: credit score, debt ratio, loan type and property type. For example, say you have two borrowers: Borrower A and Borrower B. Borrower A has a credit score of 760 and a 80% LTV, whereas Borrower B has a credit score of 760 and a 70% LTV. In this situation, Borrower B will almost always receive the lower rate because he or she represents a lesser risk than Borrower A.
If you want to buy a home in the next year and have a less-than-ideal credit score, spend some time working to improve your credit score. This can be done easily by buying medium-sized items with your credit card and paying them off early or on time.
If you are planning on buying a home in the next year and have a high LTV ratio, you’ll want to spend some time reducing your debt. Paying off student loans, car loans, and any other types of loans can help you accomplish this. Though you might have a little less money in the bank for a down payment, you’ll most likely be able to qualify for a lower rate because you’ll represent a lower risk to the lender.
If you’re looking to refinance, do it now as opposed to later. Mortgage rates are only going to increase in the coming months, so you’ll want to lock in the low rates as soon as you can. Talk to your lender about refinancing to keep your rates low in the face of tapering.
Historically, rates are affected after the jobs report is released the first Friday of each month. If there are lots of available jobs, rates usually rise. If unemployment is high, rates will reduce. Waiting for the jobs report each month could be a gamble, but it could also represent a good time to buy depending on the outcome.
Rates are highly dependent on the type of loan you take out, such as a conventional loan or an FHA loan. FHA loans usually offer better rates than conventional loans, but have private mortgage insurance premiums each month. Also, if you have a high credit score, a conventional loan will be of benefit to you as conventional loans are usually very tied to credit scores.