In this article
- A Simplified Guide on How to Assess the Mortgage Rate Market
- Examples of How Mortgage Lenders Choose Mortgage Rates for Mortgage Applicants
- Explainer: What is the Difference Between an Interest Rate and APR?
- When Choosing a Mortgage Should I Be Guided By the APR?
- There Are Other Factors That You Should Consider When Choosing A Mortgage Lender…
- Where Can I Find the Mortgage Company with the Best Rates?
Truth be told, choosing a mortgage can be a hectic, confusing and time-consuming task especially if you are a first-time applicant. What makes the process arduous is the many processes that you have to go through before your application finally gets reviewed and accepted or denied. Despite the many hurdles that you may have to go through, it is prudent that you take time to research before settling on a mortgage company.
Ideally, you should compare the rates of different lenders before settling on any particular one. By checking the rates of different mortgage companies, you will get to understand exactly how much money you will eventually part with to cover your mortgage. Even though the rates you are being offered by different lenders may differ by just a few percentage points, these differences can have a huge impact on your finances in the long run.
Just a few years ago, you just needed to go to your primary bank to take out a mortgage loan. However, recent innovations have changed how the mortgage industry works. Today, there are many mortgage companies in the market – and, to find the best company, there are many details you need to check out such as reviews by past customers as well as the experiences of past clients.
All these details can easily be accessed through easily accessible hand-held devices such as your smartphone. A good example of how the mortgage market has changed is that today, you can learn of the rates that you qualify for without even visiting a mortgage broker though there are some mortgage companies that still employ mortgage brokers.
We know that the process of searching for the best mortgage rate can be time-consuming and tiring. Despite these hurdles, we still recommend that you take your time identifying reputable mortgage companies in your locality and comparing their rates before settling on any particular one. If you are looking to own a mortgage-backed home, our mortgage calculator can help you quickly and conveniently learn how much you qualify for from different mortgage lenders in your locality.
A Simplified Guide on How to Assess the Mortgage Rate Market
One thing to remember is that mortgage rates change from time to time. This means that the rates that you may be expecting to get may vary depending on several factors. If you are looking for the most favorable rates, there is only one secret … Make yourself look like a trustworthy and appealing borrower to mortgage companies.
Note that when mortgage companies are assigning applicants mortgage rates, they usually consider the likelihood of each borrower defaulting on their loan payments. Since the mortgage lender will be fronting you cash for your house purchase, they will determine how much risk they are willing to take by fronting you cash. If a lender determines that you are at a high risk of defaulting on your mortgage, you will most certainly be assigned a higher interest rate on your mortgage.
There are several ways that mortgage companies judge loan applicants. As a rule of the thumb, they will first check your savings, your flow of income and credit score to determine if you are likely to honor your loan obligations.
If a homeowner has great savings, a good credit score and a good history of repaying outstanding loans, they are usually assigned a good mortgage rate since their financial history shows that they can be entrusted to make loan repayments on time.
On the other hand, a borrower with a poor credit history and a history of defaulting on loan repayments will be seen as an applicant who will likely default on their mortgage repayments. This type of borrower will be assigned a higher rate compared to one with a favorable financial history. Another reason why a borrower may be assigned a high mortgage rate is if they have a high debt-to-income ratio. A high debt-to-income ratio usually arises if your income is not enough to cater for existing debts.
If you currently have a bad credit rating, it may be a great idea to first build your credit score before applying for a mortgage since applying with a bad score will result in higher interest rates from potential lenders.
Examples of How Mortgage Lenders Choose Mortgage Rates for Mortgage Applicants
Consider the scenarios discussed below to better understand how mortgage companies assign rates to borrowers…
As it is, you are looking to apply for a mortgage …
If you have a great FICO score, say between 750 and 850, and, your savings and assets can cover for the 20% down payment that most property sellers request for, and, your income can cover at least three times the monthly loan repayment asked for a mortgage lender, then you will be considered a reliable borrower. In such instances, you will be offered a low mortgage rate and you will most likely even have the lowest rates in the market.
On the other hand, if your assets and savings cannot cover the home deposit, your mortgage lender will likely consider you a risky borrower and they will deny your loan. In such a scenario, they will most likely point you towards other financiers such as Government-backed Federal Housing Authority (FHA) and Department of Housing and Urban Development (HUD) loans.
Note that most Government-backed home-buyer loans usually accept applicants who have fair to good credit scores. These home-buying programs typically offer 30-year fixed rate loans and reduced down repayments that can also be repaid using grants (where available). Though Government-backed programs are great for homeowners who cannot access traditional mortgage loans, they typically require that the borrower takes out a mortgage insurance – which usually adds to the total cost of monthly housing payments.
Explainer: What is the Difference Between an Interest Rate and APR?
The Annual Percentage Rate (APR) is the figure that helps you understand the true cost of the mortgage you are about to take. The APR usually takes into account all fees and costs included in the mortgage such as home closing costs and then distributes these costs over the life of the mortgage (usually subdivided annually) to help you understand the true cost of the mortgage loan you are about to undertake.
In contrast, the interest rate on your mortgage is usually calculated on a monthly basis. It is usually calculated by looking at the annual loan balance you have and the number of months in a year. It does not usually include extra costs such as closing fees.
Of the two rates, the APR usually provides a better understanding of how much your mortgage will eventually cost.
The Federal Government usually requires that mortgage lenders list down their APR’s so that no extra hidden or unexpected charges can be added to the mortgage. It is important to understand the APR being offered by different lenders especially if the loan is coming in at a low interest rate and a high closing rate, or, a high interest rate and low closing costs. In either way, the mortgage that comes with a lower APR may work out best for you financially in the long term.
In almost all instances, the APR will be higher than the interest rate stated by the lender. Usually, the APR is usually just a few percentage points higher than the interest rate. If the difference between the APR and the interest rate is too high, think twice before choosing the mortgage. Note that for mortgages that are spread over long periods of time, say 30 to 40 years, the difference between the two rates should not be too high. For mortgages spread between smaller durations of time, say, 20, 25 or 10 years, the APR will likely be significantly higher than the interest rate.
When Choosing a Mortgage Should I Be Guided By the APR?
The APR is a great tool for analyzing the offers by different mortgage lenders. However, apart from checking the APR, we also recommend that you check out other factors influencing mortgage costs before settling on a mortgage lender. For example, if your assets and savings can cover down payment costs, you may consider going for a mortgage with higher closing costs and a lower monthly repayment that you can comfortably cover with your income.
There Are Other Factors That You Should Consider When Choosing A Mortgage Lender…
For example, you should ask yourself:
• Do I prefer to deal with my mortgage lender personally or do I prefer an institution that I can deal with online?
• Do I want to deal with a local lender or is the location of the lender not of consequence?
• Do I want to deal with a relatively new lender or an established lender?
The reason to consider all other factors is that you may be dealing with your chosen mortgage lender for a long period of time. As such, it is best to settle for a lender whose terms and modus operandi you are comfortable with.
Before signing a mortgage contract with any lender, diligently carry out research on the lender by reading their publications, talking to brokers and reading reviews to understand exactly how the mortgage company operates.
Where Can I Find the Mortgage Company with the Best Rates?
Different mortgage companies base their mortgage rates on different circumstances. Each lender usually has their own techniques of calculating rates for applicants. Identifying the lender with the best rates will depend on your unique circumstances.
As such, we strongly recommend that you compare and contrast different mortgage companies to find out if what they have to offer aligns with your financial goals. By using online tools such as our Mortgage Rate Comparison Tool, you can get a pretty good idea of what different lenders will offer you.
As a recap, always check your credit score before applying for a mortgage as it can help you get a better understanding of your financial standing and how your finances will be impacted when you take out a mortgage.