While we are sensitive to the many who are suffering because of COVID-19, the pandemic has created a unique opportunity for those who have a need and are still financially able to buy a home, refinance an existing mortgage, or are looking for an investment property. Mortgage rates are at an all-time low, competition may have eased in some neighborhoods, and prices have steadied. And, the major portion of these transactions can be done over the phone and internet. Getting all of the paperwork done online in advance will put you at an advantage. When it is essential to view a property, these occasional meetings involve few people so enhanced health precautions can be practiced.
What a drop in interest rate means
The biggest factor is a drop of about a full percentage point in interest. Of course the rate you will be offered depends on a variety of factors, but let’s first take a look at how a one percent difference in mortgage rate affects how much you would pay.
A one percent difference in mortgage rate on a $700,000 loan decreases your monthly payment by about $410. Although that might not seem like a big deal, over the life of the loan you’ll pay approximately $147,600 less in interest.
How lenders determine your interest rate
Your credit score is one of the biggest factors in determining your mortgage rate. The higher your score, the better opportunity for a good rate. You may need a FICO score of at least 700 to qualify, with a score of 740 considered good, and a higher score excellent.
The bigger your down payment, the lower the mortgage rate. If you put down 20 percent or more, you have lowered the risk for the lender, and the rate will reflect it.
The loan length also affects rate for the same reason. The shorter your loan, the less risk for the lender. If you can swing it, a 15-year mortgage will have a better interest rate than a 30-year mortgage. Just keep in mind your monthly payment will be higher on a shorter-term loan. However, over the life of the loan, you will have paid far less in interest.
Your lender obviously wants to know that you have a stable income so you can pay off the loan they are giving you.
If you’ve just changed careers, own your own business, earn your income mostly from freelancing, or have less than a consistent two-year work history, you’re less likely to get the best rates.
These scenarios demonstrate that your financial situation has been subject to change in the past. Even if you own your own seemingly stable business, this still makes you a greater risk because you have more to lose.
Where you live can have a bearing on your rate. Rates vary by state, and tends to be based on how well the housing market is doing in your state. Hawaii’s rate at the time of this writing is 3.19% for a 30-year loan, and is declining according to Bankrate.com.
Type of loan
There are different types of loans you may qualify for that impact your mortgage rate.
15-year and 30-year mortgages are the most common, with 20 percent typically required as a down payment. However, FHA loans (which get their name from the Federal Housing Administration) require much smaller down payments (as little as 3.5 percent). On the other hand, FHA loans may also require the homeowner to purchase private mortgage insurance– an extra fee– which protects the lender against default.
In the mortgage world, there’s these things called points. In the simplest terms, a point is an upfront fee paid to lower your interest rate by a fixed amount (usually 0.125 percent).
Paying points makes sense if you have the cash to pay them and you plan to hold the loan for a long time.
Interestingly, refinancing rates, at 3.87% for a 30 year loan in Hawaii today are close to the mortgage rates. Usually refinance rates are higher. The same types of qualifications process for a mortgage loan applies to a refinance. However, lenders prioritize mortgage loan applications over refinance applications, so be prepared to be patient during this busy time.
Rates for purchasing income property generally skew higher than a primary home purchase. Currently, investor mortgage rates in Hawaii are similar to refinance rates.
If you do decide to purchase income property on Maui, we would be delighted to give you a proposal on managing your long-term rentals through Destination Maui Realty, or transient accommodation rentals through our sister company, Destination Maui Vacations.