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Refinancing Your Mortgage When You Have Bad Credit

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

no closing cost refinance
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With interest rates rising, it may not seem like the best time to refinance — especially if you have bad credit. But in many parts of the country, home values have risen significantly in the past few years, which may make a refinance worthwhile even if you’ve got some credit challenges.

Refinancing can also be a useful tool to address some of the underlying credit issues you face. Refinancing your mortgage when you have bad credit could allow you to get cash to pay off credit card debt, improve your future credit scores and lower your total monthly expense.

Here’s a guide on why you might want to refinance now with bad credit, and how you can do it.

Refinancing to pay off other debt

One of biggest reasons to refinance when home values are going up is to access some of the equity you have built since you bought your house. Equity is the difference between how much you owe on your mortgage and the current value of your home.

With a cash-out refinance, you get a new mortgage for a greater amount than your current loan, and receive the balance in cash. You can then use that money to settle other debt and start boosting your credit score.

  • You can pay off high-interest rate credit cards. Even if you end up with a higher rate on a new mortgage, the rates on credit cards if you have poor credit are likely much higher — in some cases, as high as 26.99%. And since credit card rates are variable, they can go up whenever the market changes. If you’re only able to make the minimum payments, it will take a very long time to pay them off.
  • You can pay off large installment loans. Sometimes sudden income or employment changes can make a recent short-term installment loan a bigger burden. An installment loan is any type of loan paid back within a set period of time, like car loans and student loans. That new minivan payment may have been affordable when you were getting large bonuses at your job, but if that extra income suddenly stops, the $700 a month payment may create a strain on your monthly budget. A cash-out refinance can be used to pay off this debt, too — not just credit card debt.
  • Your balance can improve your future credit scores. A big part of your credit score is driven by how high your credit card balances are compared with the maximum you can charge, a number called your credit utilization ratio. If your credit cards are maxed out, your scores are likely to be lower. If you pay your balances down, and keep the balances low in the future, your credit scores may improve significantly.

It’s important to look at your short-term and long-term goals when considering a cash-out refinance to pay off debt when you have bad credit. You are replacing short-term debt with a long-term obligation, and starting over the clock on your mortgage. On the flip side, mortgage, student loan or car loan balances have less of a negative impact on your scores than high balances on credit cards.

There may be ways to minimize the amount of cash you take out. Try to budget to pay down or pay off credit card balances. Think about trading in a car with a high payment for something smaller or older to reduce the monthly payment.

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Other reasons to refinance with bad credit

Although debt consolidation can provide a financial benefit, there are other objectives that can be accomplished with a refinance when you have bad credit.

  • Replenishing cash reserves. Cash can be taken out to create a cushion for an expected future purchase or expense, rather than using credit cards that are likely to have very high rates and payments.
  • Moving away from an adjustable or interest-only mortgage. If you currently have an adjustable rate or an interest-only payment period, you may have received notice that your payment is about to go up substantially. Refinancing to a fixed rate can give you security against large monthly payment increases in the future.
  • Renovating or upgrading your house. With bad credit, it’s much harder to get a home equity line of credit or a home equity loan. A cash-out refinance could help you do those upgrades to increase the value of your house, or take care of much needed repairs like a roof replacement or new air conditioner.

Credit union personal loans

Another source for personal loans is credit unions. In general, the rates at credit unions tend to be lower than those at traditional banks. Loan terms are often more flexible and borrower requirements less stringent.

Furthermore, consumers typically receive a more personal experience. Considering all these factors, many consumers choose to take out personal loans at credit unions over traditional banks.

  • Average rates: The APR at credit unions currently ranges from 6.49% to 18.00%. As of September 2018, the average rate at credit unions for a 36-month personal loan is 9.33%.
  • Term length: Depending on the lender, borrowers can choose terms from 12 months to 84 months.
  • Borrowing limits: Loan amounts vary among credit unions with some allowing up to $25,000 while others permit up to $50,000.

Programs available for refinancing with bad credit

Government loan programs such as FHA, VA and USDA loans will provide you with the most flexibility for refinancing if you have credit issues. Besides allowing you to get more cash out than conventional loans, they also allow for higher debt-to-income ratios, which means you can borrow more than you would be able to with a conventional mortgage.

Be prepared to provide extra documentation to offset your credit challenges. Write down a detailed explanation about what caused late payments, collections or charge offs and how things have improved, or will improve with the refinance.

  • Conventional cash-out refinance: Conventional mortgage programs will allow you to borrow up to 80% of the value of your house and have few restrictions of what you use the cash out for. If your scores are under 680, it may be difficult to get approved up to the maximum.
  • FHA cash-out refinance: The HUD-insured FHA mortgage is a government loan program that allows you to access up to 85% of the value of your home with few limits on how you use the money. FHA loans offer more flexibility for lower credit scores and credit issues, and allow for higher debt-to-income ratios than conventional loans.
  • VA cash-out refinance: Qualified military veterans can borrow up to 100% of the value of their home, and there are few restrictions on the use of the money. VA loans offer more allowances for credit issues, and can be approved for even higher debt-to-income ratios than FHA loans.
  • USDA cash-out refinance: The USDA loan program does allow borrowing up to 100% of the value of the house, but only for repair or remodeling of the home. Since the funds have to be provided to a contractor, this is considered more of a construction loan than a cash-out refinance. All of the money must be paid to contractors for the repair or construction work that is done.
  • FHA streamline refinance with and without an appraisal: After you have made six payments on time with your current FHA mortgage, you are eligible for a streamline refinance. The biggest advantage of this program is it doesn’t require proof of income, and if you are willing to pay some closing costs, you won’t need an appraisal either. The FHA streamline also doesn’t require a full credit report, just proof that your current mortgage has been paid on time the past six months. If you need to roll in costs, then you’ll need to get an appraisal.
  • VA interest rate reduction loan: Similar to the FHA program, this loan allows qualified veterans to refinance their current VA loans without verifying income and does not require an appraisal in most cases.
  • USDA streamlined assist: Allows for a refinance of the current USDA mortgage without full documentation of income, and without a new appraisal. You must save at least $50/month, and the last 12 months of mortgage payments must have been made on time.

What credit scores do lenders need to refinance a mortgage?

The credit scores needed to refinance a mortgage are not much different from what is needed to buy a house. Beyond the credit scores, lenders are still going to look at how you’ve managed your payment history on your credit report the past 24 months.

Your mortgage payment history will carry the most weight in the approval decision-making, followed by credit cards and installment loans. For example, you may have had some late payments on your credit cards, but if your recent mortgage payment history is perfect, the lender may still approve your loan.

The consequence of bad credit is a higher cost of credit. Below is a loan level price adjustment chart that is used by one of the largest sources of mortgages in the U.S., Fannie Mae, based on an LTV range of 75-80%.

Credit ScoreIncrease to the cost of your interest rate

More than 740

0.50%

700-719

1.25%

680-700

1.75%

660-679

2.75%

640-659

3.00%

Using the grid above, someone pursuing a $250,000 maximum cash-out refinance with a credit score between 640-659 is going to pay $3,125 more than someone who has a score between 680-699 if they are borrowing the maximum 80% cash out on a conventional mortgage refinance.

Below are the minimum scores for refinancing based on the different loan programs available.

  • Conventional: 620 is the standard minimum for Fannie Mae and Freddie Mac conventional mortgage loans.
  • FHA: FHA loans will require a 580 FICO score for most refinance loans. Exceptions can be made for scores as low as 500, but will require a higher amount of equity.
  • VA: Most lenders will require a 580 FICO score, although like FHA, exceptions can be made depending on the equity level.
  • USDA: Most lenders will require a 640 score, although exceptions can be made down to 580.

Shopping around for a good rate when you have bad credit

Just because you don’t have the highest credit score doesn’t mean you shouldn’t shop around for the best rate. One place to start shopping is with LendingTree’s Mortgage Refinance Rates tool (Note: MagnifyMoney is a subsidiary of LendingTree).

However, you do need to ask a few more questions with rate shopping if you have bad credit. The following steps will give you the information you need to get the most accurate quotes.

  • Get rate quotes on the same day. Much like stocks, interest rates change daily, sometimes even hourly, depending on market conditions. It’s important to set aside enough time to obtain your quotes on the same day. Besides the rate itself, you want to know about the fees. Very low advertised rates will often require higher origination and other fees.
  • Make sure you are getting quotes for the same lock periods. When you receive a quote, the interest rate is generally locked in for a certain period of time. The longer period you lock, the more expensive the rate. Be sure you are getting at least a 30 to 45 day rate quote to give enough time for the appraisal and approval process.
  • Make sure information you give lenders for the rate quote is the same. Have a checklist of information you give to all of the lenders you contact: credit score, property type, value and loan amount should be the same with all of the quotes.
  • Ask if the lenders have any extra guidelines for bad credit. Be sure to tell lenders upfront if you have recent late payments on mortgages, credit cards or other negative credit issues. It’s better to know sooner if they can’t approve your loan.
  • Ask the lender if they specialize in refinances for bad credit. There are lenders that have additional experience and investor choices for bad credit. Ask a lot of questions. If you don’t get a lot of answers or feedback, move on to the next lender.
  • Make sure there are no upfront nonrefundable fees. The only fees that lenders should require before closing are the credit report and appraisal fee. Any other fees should be payable at closing.
  • Make sure you get the quotes in writing on a Loan Estimate form: Verbal rate quotes don’t hold any weight, so be sure you are comparing your rates and fees on a “Loan Estimate” form so you can compare all the offers side by side. You can also use the written estimates to negotiate between the lenders for the best terms.

The bottom line: You can refinance even with bad credit

Before you start the process, use a mortgage refinance calculator to get an idea of what the rates will be based on your credit score right now.

You will most likely have to provide more documentation with your refinance if you have bad credit. Lenders will want more proof that your income is stable, your assets are solid, your home is in good condition, and will likely require detailed explanations of all of the negative items on your credit report.

If at first you don’t succeed, try another lender. Not all mortgage lenders have access to the same programs, so getting turned down by one mortgage company doesn’t mean you won’t be able to get approved.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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Life Events, Mortgage

The Hidden Costs of Selling A Home

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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When you decide to sell your home, you may dream of receiving an offer well above your asking price. But putting your home on the market requires you to open your wallet, which could cut into your potential profit.

While some line items probably won’t come as a surprise, you may find that there are a handful of hidden costs.

Below, we highlight those unexpected expenses and everything else you need to know about the cost of selling a house.

The hidden costs of selling a home

It’s easy to fixate on the money you expect to make as a home seller, but don’t forget the money you’ll need to cover the cost to sell your home.

A joint analysis by Thumbtack, a marketplace that connects consumers with local professional services, and real estate marketplace Zillow, found that homeowners spend nearly $21,000 on average for extra or hidden costs associated with a home sale.

Many of these expenses come before homeowners see any returns on their home sale. Money is spent in three main categories: location, home preparation and location.

Location

Your ZIP code can influence how much you pay to sell your home. Many extra costs are influenced by regional differences — like whether sellers are required to pay state or transfer taxes.

For example, if you’re in a major California metropolitan area like Los Angeles, you may pay more than double the national average in hidden costs when selling your home.

Below, we highlight 10 of the metros analyzed in the Thumbtack/Zillow study, their median home price and their average total hidden costs.

Metro Area

Median Home Price*

Average Total Hidden Costs of Selling

New York, NY

$438,900

$33,510

Los Angeles-Long Beach-Anaheim, CA

$652,700

$46,060

Chicago, IL

$224,800

$18,625

Dallas-Fort Worth, TX

$243,000

$19,350

Philadelphia, PA

$232,800

$21,496

Houston, TX

$205,700

$17,477

Washington, D.C.

$405,900

$34,640

Miami-Fort Lauderdale, FL

$283,900

$24,241

Atlanta, GA

$217,800

$18,056

Boston, MA

$ 466,000

$35,580

Source: Thumbtack and Zillow analysis, April 2019.


*As of February 2019.

Generally, selling costs correlate with the home price, so expect to pay a little more if you live in an area with a higher-than-average cost of living or one that has a lot of land to groom for sale.

Home preparation

Thumbtack’s analysis shows home sellers may spend $6,570 on average to prepare for their home sale. These costs can include staging, repairs and cleaning.

Buyers are generally expected to pay their own inspection costs; however, if you’ve lived in the home for a number of years and want to avoid any surprises, you might also consider paying for a home inspection before listing the property for sale. Inspection fees typically range from $300 to $500.

Staging is often another unavoidable expense for sellers and can cost about $1,000 on average, according to HomeAdvisor. Staging, which involves giving your home’s interior design a face-lift and removing clutter and personal items from the home, is often encouraged because it can help make the property more appealing to interested buyers.

It also helps to have great photos and vivid descriptions of the property online to help maximize exposure of the property to potential buyers. If your agent is handling the staging and online listing, keep an eye on the “wow” factors they include. Yes, a virtual tour of your house looks really cool, but it might place extra pressure on your budget.

You could potentially save hundreds on home preparation costs if you take the do-it-yourself route (DYI), but expect a bill if you outsource.

Closing costs

Closing costs are the single largest added expense of the home selling process, coming in at a median cost of $14,,281, according to Thumbtack. Closing costs include real estate agent commissions and local transfer taxes. There may be other closing costs, such as title insurance and attorney fees.

Real estate agent commissions range from 5-6% of the home price, according to Redfin. That amount is further broken down by 2.5-3% being paid to the seller’s agent and the other 2.5-3% being paid to the buyer’s agent.

The taxes you’ll pay to transfer ownership of your home to the buyer vary by state.

Other closing costs include title search and title insurance to verify that you currently own the home free and clear and there are no claims against it that can derail the sale. The cost of title insurance varies by loan amount, location and title company, but can go as high as $2,000.

If you live in a state that requires an attorney to be present at the mortgage closing, the fee for their services can range from $100 to $1,500.

There are also escrow fees to factor in if you’re in a state that doesn’t require an attorney. The cost varies and is usually split the homebuyer and seller.

If you have time to invest, you could try listing the home for sale by owner to eliminate commission fees. One caveat: Selling your home on your own is a more complicated approach to home selling and can be more difficult for those with little or no experience.

Other home selling costs to consider

Now that you have an understanding of the costs that may get overlooked, remember to budget for the below expenses as you prepare to sell your home.

Utilities

It’s important that you make room in your budget to keep the utilities — electricity and water — on until the property is sold. (This is in addition to budgeting for utilities in your new home.) Keeping these services active can help you sell your home since potential buyers won’t bother fumbling through a cold, dark property to look around. It may also prevent your home from facing other issues like mold during the humid summertime or trespassers.

Be sure to have all of your utilities running on the buyer’s final walk-through of the home, then turn everything off on closing day and pay any remaining account balances.

Homeowners insurance

Budget to pay for homeowners insurance on the home you’re selling as well as your new home. You’ll still need to ensure coverage of your old property until the sale is finalized. Check the terms first, as your homeowners insurance policy might not apply to a vacant home. If that’s the case, you can ask to pay for a rider — an add-on to your insurance policy — for the vacancy period.

Capital gains tax

If you could make more than $250,000 on the home’s sale (or $500,000 if you’re married and filing jointly), take a look at the rules on capital gains tax. If your proceeds are less than the applicable amount after subtracting selling costs, you’ll avoid the tax. However, if you don’t qualify for any of the exceptions, the gains above those thresholds could be subject to a 15% capital gains tax, or higher. Consult your tax professional for more information.

How to save money when selling your home

Keep the following tips in mind when you decide to put your home on the market:

  • Shop around and negotiate. Don’t settle on the first companies and professionals you come across. Comparison shop for your real estate agent, home inspector, closing attorney, photographer, etc. It could also work in your favor to try negotiating on the fees they charge to save even more.
  • Choose your selling time carefully. The best time to sell your home is during the spring and summer months. If you wait until the colder months to sell, there may not be as much competition for your home.
  • DIY as much as possible. Anything you can do on your own to spruce up your home — landscaping, painting, minor repairs, staging — can help you cut back on the money you’ll need to spend to get your home sold.

The bottom line

There are several upfront costs to consider when selling your home, but planning ahead can help you possibly reduce some of those costs and not feel as financially strained.

List each cost you’re expecting to pay and calculate how they might affect the profit you’d make on the home sale and your household’s overall financial picture. If you’re unsure of your costs, try using a sale proceeds calculator to get a ballpark estimate of your potential selling costs. Be sure to also consult a real estate agent.

If you’re starting from scratch on your next home, here’s what you need to know about the cost to build a house.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Mortgage

When Is the Best Time to Buy a House?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Fall may be the best time to look for a house
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Timing a new home purchase can be tricky. Should you start looking in the spring or in the summer? Should you wait for lower interest rates, or make an offer on a house you love even though the price is higher than what you budgeted? These are a few questions you may be pondering if you’re considering buying a house.

It’s common to look for cues about the best time to buy from the local housing economy or from what friends and real estate agents say, but the answer often lies closer to home — with an honest look at your personal finances. We’ll delve into some facts and figures to help you answer the question: When is the best time to buy a house?

The best time to buy a house is when you’re financially ready

Your kitchen table may be covered with listings of all the homes you’re interested in, detailed analyses of mortgage interest rate trends, historic home price appreciation and a plethora of other technical financial data about the timing of a home purchase. None of that information will matter if you aren’t financially ready to buy a home.

So how do know when you’re financially ready to buy your home? We’ve come up with five sings to help you determine if your homebuying timing is right.

1. You know your payment comfort zone

Before you ever speak to a loan officer, do some soul searching about your payment comfort zone — that is, how much you can comfortably afford to spend on a monthly mortgage payment alongside other regular expenses. This might be an unfamiliar concept, but taking the time to seriously consider your payment comfort zone may result in a different monthly payment target than the “maximum qualifying” number you’ll receive from a lender.

The Consumer Finance Protection Bureau considers 43% to be the maximum debt-to-income ratio (DTI) to meet the definition of a “qualified mortgage” — the stamp of approval from the regulatory powers that you’ll be able to afford your mortgage. Just multiply your monthly income by .43 and you’ll arrive at the government recommended total debt number. For example, if you earn $6,000 per month, your total debt including your monthly mortgage payment shouldn’t be more than $2,580. But is that really your payment comfort zone?

Start by asking yourself questions like how much do you take home every month after health insurance, retirement savings, local and federal taxes and Social Security deductions? What about your gym membership, the kids’ karate classes and the new organic food regimen that just pushed your grocery budget from $400 per month to $600?

When you start subtracting the realities of your month-to-month budget from your take-home pay, $2,580 of mortgage and other debt may not leave you much breathing room for a sudden pipe burst in a bathroom, or an air conditioner that takes its last breath on the hottest day of the summer.

Once you’ve worked the numbers backward from all of your monthly expenses — not just the ones the lender uses to get you preapproved for a mortgage — you’ll have an honest idea of what you can comfortably afford.

Here’s a side-by-side review of the money left over from a $6,000 monthly income when considering your organic fruit diet, martial artist kids and your monthly commitment to fitness, assuming you take home about 75% of your before-tax income.

Money left over just looking at 43% DTIMoney leftover after expense reality check
$6,000 before tax income$4,500 take-home pay
($2,580) suggested expenses for 43% DTI($600) (gym membership/karate/organic grocery markup)
($2,580) suggested by 43% DTI
$3,420 extra income suggested by lending guidelines$1,320 actual leftover real-life income

If your monthly income before taxes is $6,000 and you buy a house using the 43% rule based on your real life take home pay and additional expenses, you’ll have $1320 left over every month for gas, groceries, utility and all other bills.

Make sure that’s enough cushion for your month-to-month expenses, and if it’s not, start scaling back your monthly payment cushion until you’ve got more breathing room in your monthly budget to comfortably cover your day-to-day spending and other obligations.

2. You know your credit score and it’s as high as possible

Besides your DTI ratio, your credit score is the most important factor in getting you approved for and snagging the best rate on a mortgage. You’ll want to get your credit in good shape before you start shopping for a mortgage.

Start by checking your credit reports for errors because mistakes could be dragging your score down. You’ll want to initiate any disputes to correct errors at least six months before you shop for a mortgage, because lenders will require you to pause any disputes in order to get your mortgage approved.

Next, review your credit scores and the factors that may be bringing them down. (Find them at https://my.lendingtree.com.) While it does take time to improve your score, one way to boost it quickly is to pay down your credit balances. This will improve your utilization ratio, or the amount of credit you’re using compared to the amount of credit available to you. Try to do this at least three to four months before you apply for a mortgage so the credit bureaus have time to reflect any payments you’ve made. And focus on making all your credit payments on time.

3. You have your down payment and emergency fund saved

When you were in the process of determining your payment comfort zone, you probably spent some time crunching down payment numbers. Generally, the more you put down, the lower your overall payment will be.

A 20% down payment will help you avoid mortgage insurance on a conventional loan, but even if you don’t have that much saved, every extra 5% down will save you money. Mortgage insurance (also called private mortgage insurance or PMI) protects lenders against losses if you default on your loan. The less you put down, the more PMI you pay monthly on a conventional mortgage.

The table below illustrates the impact every additional 5% down makes on a $200,000 house if you have a 760 credit score and take out a 30-year fixed rate of 4.25% on a conventional loan in Arizona.

Down paymentLoan amountMonthly mortgage insuranceTotal monthly PIMI (Principal/interest/mortgage insurance)
5%$190,000$193.17$1,127.86
10%$180,000$130.50$1,015.99
15%$170,000$66.58$902.88
20%$160,000$0$787.10

In addition to your down payment, financial planners often recommend having three to six months’ worth of basic expenses in an emergency fund. Lenders also like to see extra money in the bank so they know you have the funds on hand to make extra payments or cover unexpected home repair expenses.

4. Your job is stable

It’s easiest to qualify for a mortgage if you have a salaried job or a full-time hourly position. If you have a position that only has a temporary base pay that will end in the near future, you may have a hard time getting approved. If you’ve been in a commissioned or self-employed position for at least two years and show enough income to qualify on your tax returns, then this is a good time to buy.

5. You plan to stay in your current location for 5-7 years

You may hear the expression buying a home is one of the biggest investments you’ll make. The most disciplined investors also talk about looking at the long term versus the short term.

When it comes to real estate, the “5-year home sale rule” refers to the fact that you have a better chance of recouping the cost of buying a home if you stay in the home for at least five years. By that time, you’ll have made 60 mortgage payments, and in most cases, you’ll see home values in your area gradually rise.

The combination of these factors usually results in a sweet spot for reselling after five years. This is important because as a home seller, you’ll be paying all of the real estate commissions for the services agents provide to sell your home. Those fees can be as high as 6% or more, and that’s money that comes off the top of the profit you make.

The example below shows how the 5-year rule works. It assumes you put down 5% on a $250,000 home with mortgage rate of 4.25%, the market appreciates 6% per year for the next five years (it has averaged 7-8% per year since 2007-08), and selling costs total 8%.

Year since purchaseHome value at 6% annual appreciation*Principal balanceTotal equitySelling costs 8%Net profit at sale
1$265,000$233,496.07$31,503.93$21,200$10,303.93
2$280,900$229,318.61$51,581.39$22,472$29,109.39
3$297,754$224,960.12$72,793.88$23,820.32$48,973.56
4$315,619$220,412.74$95,206.26$25,249.52$69,956.74
5$334,556$215,668.28$118,887.72$26,764.48$92,123.24
*Average appreciation rate since the 2007-08 financial crisis

It’s best to buy when rates are heading down

It’s impossible to know exactly what interest rates are doing, but if you see a lot of news about rates dropping, it’s worth it to get a payment quote. From December 2018 to August 2019, mortgage rates offered for many mortgage programs dropped nearly one percentage point, which has a huge impact not only on your monthly payment, but on how much interest you pay over the life of the loan.

We’ll look at how a one percentage point reduction in the interest rate can make a monthly payment difference for a $150,000, $250,000 and $350,000 loan. Using the 5-year rule, we’ll also look at how much extra equity and interest savings you realize by the time you make your 60th payment (12 months of payments x 5 years = 60 payments).

Loan amountMonthly payment at 4.75%Monthly payment at 3.75%Monthly payment savingsInterest savings over 5 years at 3.75%Extra equity at 5 years
$150,000$782.47$694.67$87.80$7,399.24$2,131.38
$250,000$1,304.12$1,157.79$146.35$12,331.08$3,552.30
$350,000$1,825.77$1,620.90$204.87$17,264.88$4,973.22

The bigger the loan amount, the more the impact on your monthly payment savings, total interest costs and equity build up. This makes shopping around for a mortgage and locking in a rate when you find the best deal even more important.

It’s best to buy when home prices are leveling off

The price you pay is just as important as the interest rate when it comes to buying. When home prices level off or rise at a slower pace, sellers tend to put their houses on the market at a more rapid pace, as they worry they may miss out on getting top dollar if prices stall out.

That’s good news if you’re a buyer, because more houses for sales may mean lower prices. Sellers may also consider contributing toward your closing costs or help you buy discount points to get a lower rate. This is also known as a “buyer’s market,” because it tends to be more advantageous to buyers than sellers.

Sales price also affects how much money you need to put down, so getting the best price will help you leave some of that down payment money in the bank to build up your emergency fund even further. Here’s an example of the effects of a 5% difference in price on your down payment, and assuming the seller is willing to pay 3% of your closing costs.

Sales price5% down payment10% down payment3% seller paid costs
$200,000$10,000$20,000$6,000
$210,000$10,500$21,000$6,300
$220,000$11,000$22,000$6,600

If you can buy a home for $200,000 versus $220,000, you’ll save $1,000 in down payment (assuming you’re putting 5% down), and the seller can potentially pay $6,000 in closing costs. The most common signs that the market is turning in your favor are “For Sale” signs. If you start seeing more of them popping up in your area or in a neighborhood you’ve had your eye on for a while, chances are you’re entering a buyer’s market.

The best times of the year to buy a home

Spring and summer are the most popular times to buy. Summer can be especially expensive for families to buy because sellers know there is pressure to find something and get settled before the start of the school year. Conversely, fall and winter are slower seasons for home sales. As a buyer, there are some months and even days when you might be able to save a bundle of cash if you’re able to make an offer and close during unpopular selling months.

The October homebuying advantage

October consistently ranks in the top three months for buyers, according to an analysis by ATTOM Data Solutions that examines dates from 2011 to 2018 during which sellers were least likely to charge a premium for single-family homes and condos. During this time, sellers are likely to accept premiums that are one-half to two-thirds lower than the highest premium months of the year (March to July).

With kids back in the full swing of school, sellers lose a big pool of prospective buyers, giving you an advantage as a prospective homebuyer.

December is the next best month for buying power

While many people are in the thick of holiday events and get togethers, homebuying may be the furthest thing from their minds. Sellers who need to sell in December will often give buyers extra motivation to consider their homes during the holiday season, and buyers prepared to forgo a cocktail party or two may be rewarded with substantial benefits.

Ringing in the new year with a cheaper home in January

If your New Year’s resolution includes home ownership, January may be a great month to look as well, according to ATTOM’s data. While most people are signing up for gym memberships, focusing on house hunting may save thousands of dollars in home costs instead of inches off your waistline.

Final thoughts about timing a home purchase

The good thing about home prices and interest rates is that they tend to move slowly, giving you time to prepare yourself for the homebuying journey. In order to take advantage of deals to buy a house, you need to have your financial house in the best shape possible.

Not only will you potentially save money with a lower rate or price on the home you buy, but the loan approval process will be much easier if you buy within your means and are able to demonstrate strong credit scores, solid income and plenty of money in the bank.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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