Ready to Purchase a Home?
Buying a home is usually quite high on our bucket list, along with having a baby or buying a car. Getting a mortgage (and knowing how to compare mortgage rates) may be the key to making at least one of those dreams a reality. However, it is not as simple as going into the bank and asking for a loan. Otherwise, we would all be doing it.
Finding a loan with the best interest rate is an essential step in the process, but this decision involves more than just numbers. The bank rates might even play a part in your choice to decide what type of property you can afford. Let’s take a look at many important factors to consider before you find the mortgage rate offers.
When you compare mortgage rates, the low mortgage rate can be appealing to a potential homeowner. However, hidden fees might not be evident until you look deeper into the offer. That is where you need to summon your efforts. Only you can make the right decision. However, we want to give you a helping hand with our simplified mortgage guidance. Stick with us, and we will walk you through the process of getting a mortgage. We’ll also give you some tips that the mortgage provider might miss during his/her explanation (by the way, make sure not to make these mortgage mistakes).
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First Steps
The first step on your search for the right mortgage (before you compare mortgage rates) is for you to get pre-approved; it’s recommended to do this before you start looking at homes. The sad truth is that there is no point for you to find your dream home only to learn that you will be turned down for the necessary loan.
A pre-approval might reveal you need to work on credit issues or pay back the outstanding debt. We recommend consulting with a lender as early as possible to identify and resolve any potential obstacles. Filling in loan applications starts the pre-approval process.
Before You Compare Mortgage Rates: Loan Options and Terms to Know
Down Payment
A down payment is the first payment toward a large purchase. Most lenders require a 20% down payment. That’s $60,000 on a $300,000 home. Shopping around for a better deal may reveal lenders who offer down-payment rates as low as 5%-10% or even 0% based on your circumstances. The initial down payment may come with a risk so always check the fine print to ensure that what looks like the best deal, actually is. A low, initial fee is appealing, but the lender still needs to make money. The interest may end up higher in the long run than if you went with the standard 20% fee.
Principal
This is the term for the loan amount borrowed minus your down payment.
Interest Rate
Unfortunately, it is not as simple as paying back the principal amount. You will need to pay back that amount plus the interest. The terms of interest may differ per lender.
Interest Rates vs. APR
The Annual Percentage Rate (APR) is what decides the final cost of the mortgage. It includes fees (including the interest rate and insurance) that come with a mortgage and is usually represented by a percentage. The federal government insists that banks list those rates and fees so that they inform consumers before they commit. The APR is a great tool when it comes to comparing multiple offers. The mortgage with the lowest APR may be the better decision for you.
For example, when you’re comparing the terms of a 40-year mortgage against a 30-year one, the fees are distributed throughout a more extended period. The APR probably won’t be much higher than the interest rate. Let’s compare mortgage rates for shorter-term mortgages with 20-, 15- or 10-year mortgage rates as an example. Here, the difference is more substantial. If you have savings available, then it might be a wise decision to opt to pay higher closing costs on a loan with a lower monthly mortgage payment.
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Cutting the Value of Closing Costs
The closing costs are another fee about which the borrower must be informed before committing to a mortgage. The buyer is not the only person who has to face fees when dealing with buying/selling of property. The seller may also have to cover fees. They could be expected to pay for both their real estate agent and the buyers’ agent commission, which typically tends to be 6% of the purchase price. Closing fees run between 2% and 5% of the mortgage; that is $7,500 to $15,000 if the final cost is $250,000. On average, the buyer pays about $3,700 in closing fees.
Steps to Reducing Costs
- Compare ‘Loan Estimate’ forms – don’t just glance at the form but read the details and ask the lender questions. Some fees with different names are for the same thing, so a keen eye can save some of the cost.
- Ask the seller to contribute – you may be able to offset the expensive closing costs by speaking with the seller to lower the price of the property. If you don’t ask, you don’t get.
- Be creative with a” “no-closing costs” mortgage – unfortunately, there is no such thing as a no-closing cost mortgage. However, there are other ways to pay for it. It can be rolled into your mortgage repayments or covered with a higher interest rate. This method may make sense if you are already paying off debt and can’t afford the high cost of the closing fees. If you can pay it on the standard terms, then this is best.
- Close on the purchase near the end of the month – One of the items included in the closing costs is prepaid homeowners’ insurance. You can lower this cost if you can time the closing of the sale closer to the end of the month.
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Compare Mortgage Rates of Today: What to Expect
According to the latest data in Bankrate’s most recent survey of the nation’s largest mortgage lenders, the benchmark 30-year fixed mortgage rate is 3.81 percent with an APR of 3.94 percent. The average 15-year fixed mortgage rate is 3.21 percent, with an APR of 3.41 percent. The 5/1 adjustable-rate mortgage (ARM) rate is 3.91 percent, with an APR of 7.00 percent.
In comparison, Canada’s bank rate has remained unchanged at 1.75% since October 2018 and is broadly expected to stay constant until November or December of 2020.
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Rates on the Rise
At its June 2019 meeting, the Federal Open Market Committee took note of current economic trends indicating an increased likelihood of a rate cut in the latter half of 2019. Given this uncertain rate environment, it may be worth your time to consider whether the best option forward would be to lock in your mortgage rate later in the year.
Still, interest rates for mortgages in the long term will generally follow the movement of the federal funds rate (the rate at which money is loaned to the bank). Economic activity in other sectors plays a significant role in your mortgage interest rate behavior.
Should I be worried if the interest rate reaches 5%?
Such a rise can have a different impact on people, and you should certainly consider what it would mean for your search. A survey by Redfin revealed that only a surprisingly low amount would call off their search entirely. What about the others? Well, on average:
- 32% would slow down their search and wait to see if the rates would come back down again
- 21% would look in other areas or buy a home with a lower cost
- 19% would increase their urgency to buy before rates went up further
Types of Mortgages: Which Suits You?
Your home is among your most significant investment. However, there is not a one-size-fits-all loan. You should understand the different types of today’s mortgage loans before comparing mortgage offers:
- The federal government does not secure conventional loans.
- The federal government backs Government-insured loans offered by private lenders.
- Jumbo loans are conventional loans where the home prices exceed federal loan limits.
Fixed-Rate Mortgages
Fixed-rate mortgages are the most common among homebuyers as your monthly payment will not change.
Adjustable-Rate Mortgages or Variable-Rate Mortgages
Adjustable-rate mortgages have a fixed-rate period during which the interest rate doesn’t change. Then it follows a long period where a variable rate is allowed as opposed to the fixed-rate described above, during which rate adjustment may occur. With this type of loan, you are not able to foresee what the rate increase will be. Therefore, this form of mortgage may be considered too high risk.
Jumbo Mortgages
As described above, a jumbo mortgage is a type of mortgage that you will need if your property is in an expensive and desired area. You will also need it if you’re buying a larger than average home which means that the property prices will go over federal loan limits. In 2019, a single-family household in the U.S. can afford a maximum conforming loan of $484,350.
Government-Insured Loans
Three agencies back government-insured loans: the Federal Housing Administration (FHA Loans), the U.S. Department of Agriculture and the U.S. Department of Veterans Affairs (VA loans). The government only sets the basic guidelines for each loan type offered through private mortgage lenders.
One such example is a USDA loan. This type of mortgage provides some benefits for those planning to buy a house in eligible rural areas. Private lenders issue USDA home loans, then the United States Department of Agriculture (USDA) guarantees them.
The USDA requires a permanent residency, a dependable income consisting of two consecutive years, an acceptable debt ratio, and a credit score of 640 or above.
Interest-Only Mortgage
Interest-only mortgages are a type of loan that requires you to pay only the interest over the agreed term via monthly payments. Once that term is up, the outstanding amount minus the already-paid interest is due. You are paying less per month, but expect a large lump sum at the end.
Condo Mortgage
Buying a condo is a decision made out of convenience. You will have to meet some higher requirements. Don’t be put off, as this does not mean you can’t get this loan. Rather, be prepared. A few things for you to consider for a mortgage on a condo are that:
- Mortgage rates are generally higher.
- There may be additional costs on the closing fee that are not standard.
- A larger down payment may be required (25% depending on the area).
Compare Mortgage Rates: Searching for the Best Options
The truth is that rates depend on individual circumstances. One rate might be best for you; however, another could be better suited to another customer. That is why it’s so crucial to look into a variety of lenders.
The first step before applying for any mortgage is to check your credit score. You should also consider the loan-to-value ratio of the property in which you are interested as this can affect the interest on the loan. Once you know these things, it will be easier to compare rates that fit your specific situation. Then, you will be ready to go through the many mortgage quotes.
Online mortgage calculators are available for you to be better prepared.
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Consider the Term of the Mortgage
Not many people have hundreds of thousands of dollars sitting in their bank accounts, ready to purchase real estate, so the money has to come from somewhere. Mortgages are inevitable, and since you are going to sit with this decision for a long time, you need to measure the pros and cons carefully.
The 30-year loan is usually people’s first choice with mortgages; however, there is a reason for the lenders to provide you with 10- and 15-year options.
Long-term mortgages usually have lower monthly payments; however, due to the duration, they are more expensive overall.
Short-term mortgages are cheaper than long-term counterparts and are quicker to pay off. The monthly payments will be higher, but the overall amount you pay will be less.
You Can Still Pay Off Longer-Term Loans Early
Many of you will consider paying the loan off earlier to pay less interest or to stop worrying about the monthly mortgage payments. Every extra dollar that you spend can lower the term of your mortgage. However, it is essential to confirm with the lender that there is no prepayment penalty.
Locking or Floating Your Rate
Bearing in mind the fact that home prices and rates are trending higher, you might consider a mortgage lock. When mortgage rates decrease, your best step would be to float your mortgage rate until you’re closer to your closing date.
Remember: Your Credit Score Matters
In general, people with a good credit score have a long history of making their credit card and other loan payments on time. Your credit score ranges from 300 to 850. You will have better chances to take advantage of lower interest rate loans when your score is higher. The good news is that those scores change all the time, and issuers don’t store them as part of your credit profile.
To qualify for an FHA loan, you need to show a minimum credit score of at least 500. On the contrary, if you aim to be eligible for a mortgage under Fannie Mae, a score of 620 is needed. If your score falls in the 500 and 579 brackets, then you could be eligible for FHA loans, but a down payment of at least 10% is required. If your score is 580 or higher, your down payment can be as low as 3.5%.
How is a credit score calculated for a mortgage?
The credit score is calculated using your complete financial profile. That profile includes outstanding debt, late payments (if any), and other financial factors that can all add/detract from your overall credit score. The most well-known credit scoring model is the FICO score.
Just how important is your credit score?
Let’s take an example. You have a 780 credit score, and you are looking to buy a $300,000 home with a 20% down payment for a 30-year term. Your rate will be 4%. That’s around $1,164 a month, not including additional fees and taxes.
If your score drops by 100 points, the rate might increase to 4.5%. In general, that could be around $25,000 over 30 years.
VantageScore or FICO Score
The Fair Isaac Corporation introduced the first FICO® scoring model to lenders in 1989, and it is still used today by 90% of top lenders to make lending decisions. The three biggest consumer credit bureaus created the VantageScore model — Equifax, Experian, and TransUnion — to create a “more predictive scoring model that is easy to understand and apply.” Your score is made up, as stated above, by your previous financial history, but the actual percentage of those factors are:
- Payment history: 35%
- Loan Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
Always Negotiate Your Mortgage Rates
When you compare mortgage offers, always consult to get the best deal on your loan. Negotiate a better interest rate and closing costs, as well as fees; however, be careful not to increase your points or to increase another fee.
With products on the Good Faith Estimate (GFE), you may discuss:
- Interest rate
- Lender fees – including the origination fee, processing, underwriting, document drawing, and courier charges
- Title insurance
- Escrow charges
Refinancing Your Mortgage
Refinancing means that you pay off your current mortgage loan with a new one. Applying for a new loan results in further checks on your credit score by the lender. Hard inquiries typically might cost you a few points from your overall score. After all, you’re effectively asking for a new loan so the process will have to start over. It is best to refinance once you have paid off a major bulk of your loan which would hopefully improve your credit score. (You can also refinance other loans, like your auto loans).
Hard inquiries typically might cost you a few points from your overall score. After all, you’re effectively asking for a new loan so the process will have to start over. It is best to refinance once you have paid off a major bulk of your loan which would hopefully improve your credit score.
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Loans and Marriage
You might ask the question of whether your partner’s financial profile can affect your profile or your decision to buy a home. You and your spouse will each carry your credit history, and that will not appear on your report. Do not delude yourself that by changing your name, you can erase your credit history. If you both apply for a credit card or a loan, lenders and issuers will check your scores separately. In this scenario, it is not a good idea for one of you to have a bad rating.
In Case You’re Evicted
Being evicted might be an obstacle to the home-buying process. An eviction is if you’ve ever failed to cover your rent and your landlord sends the delinquency to a collection agency. The eviction may show on your credit report through available public records.
This record shows a debt owed through a civil judgment and then stays on your record for seven years. Unfortunately, the eviction can stay on your credit report for up to seven years. The good news is that you can get rid of this damaging information from your file. The best way is to pay your bills on time and keep your debt low so that you can improve your credit health. Some counseling agencies can help you with the process.
Certificates of Deposit (CD): Get More Out of Your Savings
A CD is a type of savings account. In exchange for the customer depositing the money, institutions usually grant higher rates or annual percentage yield (APY) than they do on accounts where customers can easily withdraw on-demand.
The terms are from three months to 10 years, and you need to plan to take advantage of this. You don’t want to put your money into a 10-year CD with a high interest rate and then lose money if you withdraw them earlier. The good news is that this risk is considered to be reasonably low.
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Let’s Go and Buy a Home
Hopefully, you now can equip yourself with enough information to know what to expect when applying for a mortgage. Take care of your credit score and don’t commit to more than you can pay back and be sure to shop around for the best dealt suited to you.
Do you feel confident in taking out a mortgage? Have you been confused about any terms you didn’t understand on your mortgage contract?
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