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Buying a house, condo, or rental property is an important financial decision, so you want to be sure that you are getting the best deal possible.
The majority of home buyers will need a mortgage loan, and finding the best mortgage rate is essential with such a large purchase.
Continue reading to learn more about the different types of mortgages and how to get the best possible interest rates.
What Is A Mortgage?
Put simply, a mortgage is an agreement through which a bank or creditor lends a chunk of cash (with interest) to someone purchasing a property. In most instances, the homebuyer puts down something like 20% cash as a down payment, and the lender covers the rest.
Of course, this is not to say that everyone relies on loans to purchase property. Being flush with enough hard-earned cash to buy a home straight up is a luxury that some enjoy.
But if you are a homeowner, chances are you signed on to a 10-, 15-, or 30-year mortgage to buy your home.
How Do Mortgage Rates Work?
Generally speaking, mortgage interest rates are influenced by seven factors:
- Your credit score
- Location of the property
- Price of the home and the amount borrowed
- Down payment
- Term length on the loan
- Type of interest rate (fixed or adjustable interest rate)
- Type of loan (e.g., VA loans, FHA loans, or conventional loans)
How to Find The Best Mortgage Rate
It’s impossible to say with any semblance of certainty which bank will give you the best mortgage. No single bank can claim that they offer the “best mortgage rate” because every home buying experience is different. A very qualified borrower seeking a modest house will generally get a much better rate than an unqualified borrower trying to buy a house that’s not really in their price range.
Best practices indicate that you should inquire with a few different lenders to gain insight into what mortgage rates they might offer and whether there are any benefits for choosing a specific one (e.g. closing credits).
While brick-and-mortar banking institutions might be the best lender for certain homebuyers, other lenders might prefer using a service like Quicken Loans’ Rocket Mortgage or an online bank like SoFi.
Do your due diligence and shop around. You’ll make the right choice.
What Are Today’s Best Mortgage Rates?
This question is difficult to answer. Every borrower’s financial circumstances are unique. While a bank might give one homebuyer an exceptionally low interest rate, that might be due to a confluence of factors—like putting down 50%, getting a relatively cheap home in an affordable part of the country, and having a near-perfect credit score.
According to Nerdwallet, the average 30-year fixed-rate mortgage currently hovers near 4% as of October 2019. This is not to say you can’t get a better rate than that—quite the contrary. Save up cash for a big down payment and improve your credit score and you may be well on your way to beating that rate.
Which Bank Has the Lowest Interest Rates for Home Loans?
There isn’t a single bank that is known for giving the lowest interest rates for home loans. Again, it varies on a case-by-case basis. Further, interest rates fluctuate every single day. So, in addition to needing to have a big down payment, a great credit score, and a house that doesn’t cost an endless amount of money, you also need to have perfect timing to get the lowest rates possible.
Of course, nobody can time rates, or the market for that matter, perfectly. So, while timing is important, don’t let it hold you back from refinancing to get a better deal, or securing a mortgage you can afford in the first place.
What Are The Different Mortgage Types & Rates?
Fixed-rate mortgages are pretty self-explanatory. With a fixed-rate mortgage, you pay the same interest rate over the entire life of the loan. It doesn’t matter if you have a 15- or 30-year mortgage. The interest rate stays the same, ensuring your monthly payments are consistent. They will never change.
What Is the 30-Year Fixed-Rate Mortgage?
A 30-year fixed-rate mortgage is a loan that has the same interest rate over the duration of 360 months. If, for example, you secured a 30-year fixed-rate loan for $200,000 at 3.5%, your monthly payments would be $898.09 (not including taxes and insurance). Assuming you pay your loan back in full over 30 years, you’ll end up paying $123,312.18 in interest to borrow $200,000 over the life of the loan.
Adjustable-rate mortgages (ARMs), on the other hand, include interest rates that change, or adjust, over time. Oftentimes, these loans start off with a low fixed-rate for a period of time— maybe five years or so. But over time, that initial rate will change. Potentially, it will go up, thus increasing your monthly payments.
Fixed vs. Adjustable Rate Loans
The differences between fixed and adjustable-rate mortgages are stark. Going with a 30-year fixed-rate mortgage provides people with consistency on the size of monthly mortgage payments being made. On the flip side, you will pay more in interest with a fixed-rate when compared to the initial interest rate with an adjustable-rate mortgage.
Jumbo vs. Conforming Loan
The amount of your mortgage loan can also dictate what type of mortgage it is. A conforming loan, for example, is less than $417,000 while anything over that amount is considered a jumbo loan.
Conforming loans have slightly lower interest rates and meet the underwriting guidelines of Freddie Mac and Fannie Mae—two government-backed companies that buy and secure mortgages. Today, the absolute maximum for an FHFA conforming loan is $625,500, though until 2011 that limit was as high as $729,750.
Government Insured vs. Conventional Loans
Choosing between a fixed and adjustable-rate mortgage loan helps set the framework for paying off the loan. But who offers and backs the different types of mortgages? Another important decision to make is choosing whether to get a government-insured or conventional loan.
Government-insured mortgages are exactly that: guaranteed by the federal government. Let’s take a look at some of those options:
FHA Loans are offered through the Federal Housing Administration’s (FHA) mortgage insurance program, which is run by the Department of Housing and Urban Development (HUD).
First-time homebuyers often use FHA loans. These financial vehicles allow you to put down as little as 3.5% for a down payment. FHA loans are not just available to first-time homebuyers, however. All sorts of borrowers can use them. As with all other government-insured mortgage programs, lenders are protected against losses in the event a borrower defaults on this kind of loan.
Remember, putting down a small down payment like 3.5% means you will need mortgage insurance, resulting in higher monthly payments. For this reason, I recommend saving up 20% for a down payment. That’s the threshold where homeowners are no longer required to buy mortgage insurance.
If you or your spouse serve in the military, the U.S. Department of Veterans Affairs (VA) offers a loan program that can provide up to 100% of the funds you need to finance your home. In other words, that means military families can purchase a house or condo without putting any money down, at all.
The U.S. Department of Agriculture (USDA) offers a loan program for rural borrowers through its Rural Housing Service (RHS). This program requires borrows to meet some pretty specific income requirements in order to be eligible. For example, a borrower’s income must be no higher than 115% of the adjusted area median income. Essentially, this program is designed for borrowers who have a low or modest income, which makes it harder for them to secure a conventional loan.
Can You Negotiate a Better Mortgage Rate?
Yes. You may be able to negotiate a better mortgage rate—particularly if you have great credit and solid financials (e.g., a big down payment, no debt, and high income).
One of the easiest ways to negotiate a better mortgage rate is by paying “points” at closing. Quite simply, a point represents $1,000 for every $100,000 of your mortgage. By paying a point at closing, for example, you may be able to reduce your interest rate by something like 0.25%.
Is a 10-Year Mortgage a Good Idea?
Every borrower is different. While a 10-year mortgage might work wonders for one homebuyer, it might not be the right option for another.
Advantages of 10-year mortgages are as follows:
- You’ll pay less mortgage insurance over the life of the loan (assuming you can’t put 20% down)
- You’ll pay less interest over the life of the loan
- You’ll own your home faster (assuming you pay your mortgage off)
- You’ll build up equity faster
But 10-year mortgages have the share of downsides, too, including:
- You’ll pay much more each month
- You’ll have less mortgage interest to deduct on your taxes
- You’ll have more equity tied up in the house, leaving you with less cash
Many people prefer getting 30-year mortgages because—due to inflationary reasons, e.g., rising incomes and cost of other expenses—they are essentially cheaper over the entire term.
Will Mortgage Rates Go Down in 2019?
It’s impossible to predict the future. But mortgage rates are trending down in 2019. This is due to the fact that the Federal Reserve has lowered interest rates several times—most recently in September 2019. Industry watchers predict the Fed will lower rates again—perhaps as soon as October 2019—so mortgage rates may continue to decrease.
However, since nobody knows what the future holds, rates may end up increasing before the year’s out. As the saying goes, “you cannot time the market.”
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