In this article
- Your Guide to Mortgage Rates
- 1. Should I get a fixed-rate or an adjustable-rate mortgage?
- 2. Should I pay discount points?
- 3. What are the closing costs?
- 4. Should I shop for first-time home-buyer programs?
- 5. How much down payment should I pay?
- 6. How do I compare?
- The following are some tips for comparing loan offers:
Mortgage rates can be confusing and purchasing a house is quite a demanding experience. Around 40% of Americans, which amounts to about 100 million people, plan to buy a home in the coming years. This is according to NerdWallet’s Homebuyer Report released in 2020.
If you are one of these people, your first step, and perhaps the most important one, is finding out the amount of mortgage you can comfortably afford. Next comes the searching process for a good mortgage lender along with a great mortgage rate. However, getting the best rates often starts with understanding some essential factors. The following are some of the essential questions you should consider.
Your Guide to Mortgage Rates
1. Should I get a fixed-rate or an adjustable-rate mortgage?
Mortgages either have adjustable interest rates or fixed rates. The fixed rates lock you into a constant interest rate that you will be required to pay through the course of the loan. Part of the mortgage payments will go towards settling the principal and the interest remains constant throughout the term of the loan. However, property taxes, insurance, and other costs might fluctuate.
The interest rates charged on the adjustable-rate mortgage will change over time. An ARM will usually start with an introductory period of three, five, seven, or ten years (or customs time frames) during which the interest rate will hold steady. After this, the rate could change periodically.
Most ARMs offer low introductory rates, though your ARM rate may rise further once the introductory period is over, which may cause the monthly mortgage payments to go up, and this can be quite substantial in some cases.
2. Should I pay discount points?
Discount points are the fees borrowers can pay at the beginning to lower the interest on their home loans. A point will typically equal 1% of the principal, and this lowers the rate by about 0.25%, depending on the lender. If your loan comes with 4.5% interest, it might be possible to pay discount points of $2,000 to lower the rate to about 4.25%. Paying discount points means that you will shell out thousands of dollars upfront to help save a few dollars every month.
It will take a few years for these savings to significantly add up and surpass the amount you paid at the beginning. This is referred to as the break-even period, and it varies based on the loan amount, the interest rate, and the cost of the points. The break-even periods often range from 7 to 9 years. If you don’t intend to have a loan for that long, it might be best to skip the discount points.
3. What are the closing costs?
These are the fees charged by the lender and other third parties. While they usually don’t affect the mortgage rate (unless when you pay the discount points), they do affect your pocketbook. Closing costs will usually amount to 3% of the purchase price of your home and will be paid out at the time you close or when you finalize the purchase.
Closing costs are made up of several different fees, including the lender’s processing and underwriting charges, appraisal fees, title insurance, and other charges. You are typically allowed to shop around for lower fees, and the Loan Estimate form will let you know which of these services you should consider shopping around for to help lower the closing costs.
4. Should I shop for first-time home-buyer programs?
Before settling on a mortgage, you should find out if you’re eligible for special programs meant to make the home buying process less costly. Most states offer some form of help to first-time homebuyers and even repeat buyers.
Each state will have its mix of programs for home buyers. Some of these programs include down payment assistance, which is often combined with favorable tax breaks and interest rates. Some programs are geographically targeted while others are meant to offer help to home buyers in certain professions like first responders, teachers, and veterans.
5. How much down payment should I pay?
Some professions, like veterans, may qualify for loans that allow for 100% financing and require no down payment. Other borrowers may qualify for mortgages that only require down payments of as little as 3%.
Here is a breakdown of the common mortgage rates:
VA Loans: If you (or a spouse) are a veteran or active in the military, you might qualify for a mortgage guaranteed by the Department of Veterans Affairs.
USDA loans: For those living in rural areas, the Department of Agriculture might guarantee you a no down payment or low down payment mortgage and help you cover the closing costs.
FHA loans: Mortgages that are issued by the Federal Housing Administration will typically allow down payments of as low as 3.5%. these FHA-insured loans are also a lot more forgiving for low credit scores, though you pay for mortgage insurance for the life of the loan.
Conventional loans requiring 3% down payment: Some borrowers qualify for conventional loans that aren’t insured by the government that only require down payments as little as 3%. These mortgages are generally meant for low- to moderate-income borrowers, or first-time borrowers. They typically charge for private mortgage insurance, also known as PMI, which could be canceled once you have over 20% in equity in the house.
6. How do I compare?
The following are some tips for comparing loan offers:
Try to apply for a mortgage with multiple lenders: Different lenders will offer different mortgage rates. The more you shop, the more savings you can accrue. Also consider applying with different kinds of lenders, including credit unions, banks, and online lenders to compare their offers.
Shop for loans limited to a preset period: The three largest credit bureaus always encourage first-time homebuyers to shop around. You are given 14 to 15 days based on the scoring model to apply for as many mortgages as you need with the same effect on your credit scores as applying for a single loan.
You can then compare the closing costs using a Loan Estimate service. Every lender is required to offer a Loan Estimate form with details of each loan product’s fees and terms. The Loan Estimate is designed to simplify the task of comparing mortgage rates among different lenders.