Excited to jump into a home loan?
Well, before you pull up your level of excitement, you need to consider several factors like loan options, house payment, interest payments, down payments, mortgage lender, mortgage interest rate, etc. to secure that home loan.
Do you need to get the best mortgage rate to buy your dream home?
Looking for the best option to refinance your house?
You need the lowest possible interest rates and we have the solution for you. But before we proceed, let us have a quick overview of Mortgages.
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Table of Contents
What is a Mortgage?
A MORTGAGE is a type of loan which uses your house or any other real estate property as collateral so you can purchase your ideal home or refinance to get a better deal. This is very useful if you do not have cash or extra funds on top of your life savings.
What are the Types of Mortgages?
Various factors determine the types of mortgages. One of the more familiar ones is the type of interest rate. We will discuss the others below. Please read on.
Types of Interest Rate
1. Fixed Rate
A fixed-rate mortgage refers to one that allows you to pay a fixed amount of monthly payment (principal and interest) during the life of the loan. The actual payment amount never changes even if, over time, you will pay more towards the principal. This type of mortgage is beneficial in terms of being consistent. If you prefer to pay a constant amount, this is ideal for you.
2. ARM (Adjustable-Rate Mortgage)
Mortgages with adjustable rates usually start with a lower rate – which is also known as a teaser rate. Since it is adjustable, lenders need not project inflation too far ahead. For a certain number of years during the life of the loan, the rate is steady – this usually goes for 5, 7 up to 10 years. After which, the rate can adjust and may go up or down. But increases also have caps on them.
Conventional mortgages, or also known as conforming mortgages, are those that are supported by Fannie Mae or Freddie Mac – but other mortgages may have other investors. Here are some basic requirements of Fannie Mae and Freddie Mac for a conventional loan:
• A 620-median credit score from FICO is needed for qualification. Higher credit scores may be needed for investment properties and second homes which are based according to loan type.
• A debt-to-income ratio (DTI) should be 50% or lower. DTI is the ratio of the monthly installment and revolving debts to the monthly gross income.
• If you’re applying for a prime residence, you can have a down payment of 3% which applies to those buying property for the first time or if the income is low-to-moderate.
• For multi-family houses, vacation, and investment properties, the down payment will be higher.
• You will have to pay for private mortgage insurance (PMI) if your down payment is less than 20%. Upon reaching 20% equity, you can request for it to be removed.
Non-conforming loans are those outside Fannie Mae or Freddie Mac. But despite this classification, you can still get the best deals from these. Most of these non-conforming loans are from government institutions. Here are some of them:
Federal Housing Administration (FHA) Mortgages offer several benefits. Its down payment can start as low as 3.5% and they allow flexibility to borrowers. You may be qualified for an FHA mortgage loan even with a credit score of 500 – but a 10% down payment is required. Please take note that scores below 580 are categorized as subprime – which means a higher interest rate.
For those residing in rural areas, the USDA mortgages will be a good option. One great advantage of this is that applicants need not pay down payment. Here are some qualifying guidelines:
You need to be living in a qualifying place. Ideally, far from the metro but please refer to the map of eligible locations.
There is no minimum credit score required by the USDA. The investors will set their parameters.
All adults in the household (including you) should not cover more than 115% of the area median income of the size of the household. Childcare payments may be taken off from income. Students only have part of the income that is counted.
USDA offers only 30-year fixed rate loans
This mortgage is especially for qualified active-duty servicemen, National Guard personnel, reservists, veterans, and eligible spouses. Eligible applicants can have a house without any down payment.
Other Types of Nonconforming Mortgages
There are many other non-conforming loans available. What’s good is that they help clients who have imperfect credit standing and who might find it difficult to qualify for other loans. Here is a very common non-conforming mortgage – the Jumbo Loan.
There are value limits for mortgages backed by Fannie Mae and Freddie Mac. The usual national limit is $548,250. But for expensive areas, these limits are posed per county up to $822,375 maximum 1-unit house. If you need a higher amount, a jumbo loan will work for you. Jumbo loans have no strict requirements and vary according to the different financial organizations.
Check out these latest policies of Quicken Loans:
- They offer jumbo loans up to $2 million.
- For a purchase (or rate/term refinance for 1- or 2-unit property) of the mortgage loan amount up to $1 million:
- Down payment 20%
- Median FICO score – 700
- Debt to Income Ratio – 43% maximum
- Other strict requirements are dependent on transaction type and amount of loan. There are more documentation requirements for Jumbo Loans because of the higher loan amount.
Interest Rates Vs. APR
This is important to know. When doing comparison shopping and looking for the best mortgage deal, you will see two interest rates.
The lower interest rate is linked to what your principal and interest payment is monthly. The higher value (usually placed beside or below the rate for monthly payments) is called the APR – the annual percentage rate. APR covers the rate of your monthly payment but also includes closing costs and other mortgage insurance payments.
To help you determine the real loan cost, refer to the APR – check the differences in costs with a bank or credit union and check out the differences in interest rates and the APR. If there is a huge difference, that means there are more costs linked to the originating loan.
What Determines Your Mortgage Rate?
FICO Credit Score
The best way to save costs on various types of financing (vehicle loans, housing loans, student loans, etc) is to boost your credit score. When applying for a mortgage, a commendable score will help you save thousands of dollars all throughout the loan. Try to aim for a FICO score of a minimum of 760.
Here are some tips to increase your score:
- Be diligent. Pay all your bills monthly – on time. You may request goodwill adjustments should you have late payments in your record.
- Use your money wisely. Pay-off your outstanding debts (ex. revolving debt like credit cards) to get a better score.
- Be realistic. Apply only for the credit that you need. Do not go overboard especially before applying.
Question: Can You Buy a House with Bad Credit?
You can possibly purchase a house with bad credit but you might be given a high-interest rate. For a credit score of 580, try checking into FHA loans (or government-backed loans). If your application is declined, don’t feel bad. Continue improving your credit score and apply once your record gets better.
Home Price and Mortgage Amount
The price of your dream house and mortgage amount affect the mortgage rate. Based on the types of mortgage loans, the rates vary. Conforming loans offer lower rates compared to non-conforming loans. And non-conforming mortgage loans offer a lower rate than the jumbo loan.
To keep it simple – to enjoy a low mortgage rate, consider conforming loans.
If you live in posh areas, you may consider non-conforming mortgages which will give your better rates as compared to jumbo loans. If you prefer a property in rural areas, your rates can be better.
Amount of Down Payment
Why is it better to give a bigger amount of down payment? Basically, investors prefer less risk in offering loans. To prevent losses on a high-risk investment, they will offer higher interest rates. By providing higher home equity through a high DP, you can enjoy a lower interest rate.
For instance, if you are unable to pay for your loan after one year, how can the investor get more of his money back? The mortgage lenders can safely get it back during foreclosure if you pay a bigger down payment. 20% is ideal although there are other mortgages that offer less.
Question: How Much Money Do I Need to Put Down on a Mortgage?
Usually, commercial lenders prefer a 20% down payment. Factors to be considered are the nature of the property, your credit score, and others.
Loan terms (15-yr vs 30-yr)
This is important. A shorter-term will lower your interest rate because the lender is less exposed to risks. Comparing a 15-year term to a 30-year term, you can benefit much by paying less interest. However, you will need to pay higher monthly.
Types of interest rate (fixed vs variable)
The interest rate is affected if it is either fixed or variable.
Usually, a mortgage with a variable rate starts low but will increase if the environment favors rate increases. Remember that.
To make the most of low rates, try adjustable-rate mortgages. For instance, you can look into a 3-1 ARM wherein your rate is fixed for 3 years and then will vary yearly afterward. It will begin with a lower rate initially. But remember, the interest rate and payment will rise also in an environment of rising rates.
Depending on the mortgage type, the mortgage rate follows. As discussed, there are several types of mortgages. We have the standard conventional mortgages and the on-conforming loans such as the VA, FHA, and USDA loans which have their specific requirements.
What’s good is that some of these specially cater to low-income buyers – although these have stricter regulations. Nevertheless, you can get a lower rate or a longer-term.
Factors Affecting Mortgage Rates
Here are some points so you will know the factors affecting the mortgage rates.
Primary Vs. Second Mortgages
If you want to have equity, remove a second mortgage. But take note that if you encounter financial difficulty, the first mortgage is given first priority and will be initially paid off. Considering the risk of these mortgages, second mortgages usually have higher interest rates.
For cash-out refinancing, take out the equity according to the primary mortgage loan so you can have a lower rate. Also, you may opt to roll your second mortgage into the primary mortgage that is under refinancing.
Wondering what IPAC means? It’s simply an acronym to easily remember the factors affecting your mortgage rate: income, property, assets, and credit.
It is common knowledge that having a higher income means you have more resources. And this assures the lender that you are capable to pay monthly and other debts. This applies to different types of loans (ex. vehicle loan, refinancing, house purchase, etc)
This refers to the type of house or property that you are purchasing – and it is highly dependent if it is a primary or second home or an investment property. Remember that second homes (and investment properties) are given higher interest rates because in a situation wherein you experience financial loss, the primary home is given first priority.
Risk and interest rates go together. Of course, you want to be sure that you can pay for your home and other properties. And in the sad scenario of monetary difficulty, you prioritize what needs to be paid first.
Do note that rates vary for single-family properties or multi-unit complex (ex. condominiums).
Good news. If you have more assets, the better your chances to get a good mortgage rate. Assets are not linked to your annual income (ex. stocks, bonds, mutual funds, other property, etc). And in case you lose your job, the proceeds of your assets can cover your mortgage. Remember, if you have more assets, you have better capability to pay – so that your interest rate will be lower.
This is very crucial. Your credit score and credit history are of immense importance. Basically, if your FICO credit score is higher, your mortgage rate is lower. As previously mentioned, you can have a stellar score by paying your obligations consistently and timely – vehicle, credit cards, other loans, properties, etc.
Also, your credit record is used to know the amount of your monthly income that is used to pay off debt. If you earn $10,000 monthly and you pay off all your obligations at $2,000 then your DTI is 20%. A lower DTI ratio represents less risk which is preferred by lenders.
So remember, if you have the best credit, you can enjoy the best rate.
Calculating for the Best Mortgage Rates
What is a Mortgage Calculator? It is an amazing tool that will help you compute and get an estimate of your PITI (your monthly house mortgage payment which includes Principal, Interest, Taxes, and Insurance). Amazing right? With this data, you can check out different scenarios so you can find a realistic price for your ideal house.
In using the Mortgage Calculator, you need to plug in the following information:
a) Home price – refers to the purchase price of the house
b) Down payment – refers to the cash paid initially to buy the house
c) Loan term – refers to the time needed for you to pay off the mortgage loan
d) Loan APR (interest rate) – refers to the cost of borrowing
e) Property taxes – refers to the yearly tax paid by you as a real property owner, levied by the city, county, municipality
f) Homeowners insurance – refers to the yearly fee paid to insure the house and belongings
g) HOA fees – refer to monthly fee towards the homeowners’ association
TIPS TO FIND THE BEST MORTGAGE RATES
So, based on what we have learned, here are the top tips for you to find the best rates:
Improve Your Credit Score
Make Sure to Pay Off Debt
Pay a Bigger Down Payment
Maintain a Steady Income (or increase it)
Shorten Your Loan Term — 15-year mortgage ideally
Search for first-time homebuyers
Consider prepaid interest points
Do your research. Compare various lenders.
Make Sure to Use a Mortgage Calculator
Take a look at interest rates and closing costs
Check out private mortgage insurance
Decide soon and don’t procrastinate
Other Ways to Getting the Best Mortgage Rates
- Buy a lower-priced home
- Get a co-borrower
- Apply for mortgage pre-approval while canvassing (especially if rates are fluctuating)
The Bottom Line
So, I hope these tips will help you in getting the best rate that you deserve and save thousands of dollars. Remember these points:
- Optimize a Mortgage Calculator to easily allow you to estimate your monthly mortgage fees.
- Consider a higher down payment so your lender will feel safer with less risk
- Take care of your credit score. Do your best to improve it especially before applying.
With all these tips, we hope you save tens of thousands of dollars and get the best mortgage rates for your dream home.
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