mortgage

What is Mortgage? How to Best Mortgage at low Interest Rate

Loan

What is a mortgage?

A mortgage is a loan taken from a bank or any other financial institution for buying a home. The collateral for the mortgage is the home you buy. This means that if the borrower is unable to make monthly payments to the lender and other defaults on the loan, then the bank gets the authority to sell the home and recoup the money received.

 

How does a mortgage work?

A mortgage consists of two primary elements:

Principal and Interest

The principal is the particular amount of money the borrower borrows from the lending institution in order to buy a home. For example, if you want to buy a home that costs $100,000 and you borrow $100,000 from a lender, then that is the principal amount.

Interest is what the lender will charge from you for borrowing the amount of money. In other words, interest is the extra amount of money you need to pay for borrowing the principal. 

Usually, borrowers pay back mortgage at regular intervals in the form of monthly payments which consists of both principal and the interest charge.

Your monthly payment can also include some of the charges stated below, based on your mortgage agreement:

 

  • Property taxes

 

The lender could also collect the annual property taxes associated with the house as a part of the monthly mortgage payment. In this case, the money collected for taxes is kept in an “Escrow” account. The lender will use this money to pay your property tax bill when the taxes are due.

 

  •  Insurance

 

Homeowners insurance will give you protection in times of a disaster, fire or some other accident. In certain cases, the lender collects the premiums for your insurance as part of the monthly mortgage payment. This money is then placed in Escrow and the payments to the insurance providers are made on your behalf when the policy premiums are due.

 

  • Mortgage insurance

 

The monthly mortgage payment could include a fee for what is called “Private Mortgage Insurance” (PMI). This is a type of insurance required by many conventional mortgage lenders when the borrower’s down payment is less than 20 percent of the price at which the home was purchased.

 

Who Can Get a Mortgage?

Getting a mortgage loan requires you to be eligible for it. Here are the eligibility requirements for the most popular mortgage loan programs:

FHA Loans

  • Borrower’s credit score should be at least 500
  • The down payment should be at least 3.5% (with a credit score of 580) or 10% (with a credit score of 500)
  • Your debt to income ratio should be 43% or less (in some cases 45% is also allowed)

Conventional Loans:

  • The credit score should be 620.
  • The down payment should be 3% (on some loan programs) or even higher, especially if you want larger loans.
  • The debt to income ratio needs to be 43%.

 

What’s The Difference Between a Loan and a Mortgage?

Loan Mortgage
Definition A loan is essentially the amount of money a person borrows from a bank or a financial institution. This amount is repaid by the borrower along with an additional interest charged by the lender. These are secured loans that are usually tied to real estate property like a land or a house. The borrowers take the loan amount to buy the property and repay the amount in installments over time along with additional interest charged, taxes and insurance premiums.
Types Open-end, closed-end loans, unsecured and secured loans, student loans, mortgage loans, payday loans. Fixed-rate mortgages, FHA mortgage loans, adjustable-rate mortgages, VA loans, interest-only and reverse mortgages, etc.

 

Parties Involved In a Mortgage

  1. Lender: This is a bank or a financial institution that lends the mortgage amount for the purchase of a house.
  2. Borrower: This is the house buyer who needs the mortgage amount for their house purchase.

 

Mortgage Terminology  

 

  • Amortization

 

Amortization of the mortgage loan is a sort of schedule that deals with how the loan is to be repaid. It refers to chalking out a plan for paying back the mortgage loan, as in spreading the payments over multiple periods, like monthly payments. The result will provide you with a monthly breakdown of how much interest the borrower needs to pay and how much to repay the amount borrowed.

 

 

  • Down payment

 

Down Payment is the type of payment made in cash for purchasing a house at the time you receive the mortgage amount. For instance, many homebuyers make a down payment of about 5% to 25% of the total purchase price of the home and the bank or other financial lender covers the rest of the costs via a mortgage loan.

Down Payments decrease the amount of interest the borrower needs to pay over the entire loan repayment period. They lower the amount involved in monthly payments and provide some security to the lenders. In the USA, a 20% down payment on a house is standard for the financial lenders. However, there are options to buy a home with as low as 3.5% down payment, such as in case of an FHA loan. 

 

 

  • Escrow

 

When you borrow money from a bank or any other financial institution to buy a house, then you will be given an Escrow account. This is an account where the lender will deposit part of your monthly payment paid for taxes and insurance. Hence, by accumulating a fraction of the annual amounts each month, the Escrow account lessens the risk of you falling behind on your bill payments. 

 

 

  • Interest rate

 

The bank or the financial institution from where you are borrowing money charges a fee for it, called interest. The rate at which a certain part of the principal along with the interest is repaid in monthly payments is called the interest rate. The interest rate on your mortgage amount can be of two types:

  1. Fixed-rate: Fixed-rate mortgage is a type of mortgage where the interest rate and term of the loan can be negotiated and set for the entire lifetime of the loan. The term of a fixed-rate mortgage can last from 10 years to up to 40 years.
  2. Adjustable-rate: An adjustable-rate mortgage, also known as ARM is a type of mortgage that has a fixed rate of interest for just a pre-decided period, like 1, 3 or 5 years. In the initial period, the interest rate will be lower and after that, it shall be adjusted based on an index. The rate can be adjusted at set intervals after that.

 

  1. Private mortgage insurance: When your loan to value (LTV) is higher than 80%, then the lenders will generally not want to do the transaction. In such cases, borrowers can receive private mortgage insurance (PMI). This is a type of guarantee to the lender that until the borrower reaches 80% LTV, they have got them covered by default. To receive this protection, borrowers need to pay a monthly premium for PMI. A popular option of getting around paying PMI is to uptake a second mortgage and use it as a source of a down payment on the first.
  2. Promissory note: Promissory note is a note in which the borrower promises to repay the mortgage loan they have taken. It is an IOU that, besides, including the promise to repay the loan, also has the terms for repayment. The note consists of the following heads:
  • Name/names of the Borrower
  • Address of the Property being Purchased
  • Interest Rate (Fixed or Adjustable)
  • Amount of the loan taken
  • Term (Number of Years of Mortgage)

The promissory note is not recorded in the country land records, instead, it is held by the lender during the outstanding period of the loan. After the loan is fully paid off, the note shall be marked as paid in full and will be returned to the borrower.

 

Loan Servicer

A loan servicer or a mortgage servicer is generally an outside company that helps with the loan procedure. This can include ensuring that the loan is awarded to the borrower and also that the borrower makes use of the loan for the purchase. The loan processing supervised by a loan servicer also includes tracking the loan payments, sending reminder notices in case the borrower has missed any of the payments, filing the foreclosure documents if the loan is in default, etc.

 

Types of Mortgage Loans

 

  • Conventional loan

 

Conventional loans are so far the most popular type of mortgage loan product. They account for the majority of the U.S. loans originating each month. They need fewer fees as compared to FHA loans and also have more stringent credit and debt-to-income protocols. The down payment requirements vary in a wide range, from 3% to 20%.

 

  • Government-insured mortgages:
  • FHA loans

 

Such loans receive the backing of the Federal Housing Administration. These require a low down payment of 3.5% and also allow people with low credit scores like 500. They also need you to pay a premium as mortgage insurance, upfront and annually as well, throughout the loan repayment. Around 1/5th of the U.S. homebuyers go for an FHA loan.

 

  • USDA loans

 

This type of mortgage loan is granted by the U.S. Department of Agriculture. These are applicable just on the properties located in the rural areas of the country. These do not need any down payment but you need to pay the mortgage insurance premiums, upfront and annually as well.

 

  • VA loans

 

These loans are insured by the Department of Veterans Affairs and are accessible only by military members, veterans, and their surviving spouses. These do not need any down payment or mortgage insurance, and they will allow spreading out of the closing expenses into the loan balance.

 

  • Conforming Mortgage Loans: These are bound to the maximum loan limits set by the Federal Government. These limits can vary from one area to another. The 2020 maximum conforming loan limit has been raised to $510,400 from 2019’s level at $484,350.
  • Non-Conforming Mortgage: Jumbo loans are the most popular and common types of non-conforming mortgage loans. These loans generally exceed the conforming loan limits. Such types of loans are riskier for a lender, so borrowers need to show larger cash reserves, put down 10% to 20% as down payment (or more if possible), and lastly have a strong credit score.

 

 

Mortgage term

The mortgage term is the amount of time, usually in counts of years, in which the mortgage parameters have legal effect. After the mortgage term expires, the remaining balance of the mortgage needs to be renewed, refinanced or paid in full amount. Both the lender and the mortgagor are legally obligated to the mortgage details for the term. At the time of renewal of the term, the borrower can move their mortgage to a different lender if they wish to.

The most common mortgage term happens to be 30 years. Back in 2016, 90% of homebuyers went in for a 30-year fixed-rate mortgage. Shorter-term loans will allow you to pay off your mortgage loan faster and that with interest but these will require higher monthly payments. Longer-term loans will translate into lower monthly payments, but the longer pay-off period equals more interest over time. You can choose the best option based on your budget and how long you wish to stay in the house.

Pros of 30-Year Term Cons of 30-Year Term
Comparatively lower monthly payments Higher interest rates
Easier to buy the house you want. Slower loan pay-off
Greater interest paid over the mortgage term

 

Pros of 15-Year Term  Cons of 15-Year Term
Low-interest rates High monthly payments
Quick loan payoff Difficult to afford the house you wish to buy.
Less interest paid over the mortgage term.

 

The mortgage application process:

 

  • Get the right credit score: Check your credit report and make sure every information in it is accurate. If not, contact the credit bureau and have it corrected. With the correct information, find out your credit score. You can get your score from the credit bureaus, some banks, and for free from some websites. Your credit score needs to be at least 620 or higher to get a conventional loan and it could be as low as 500 for an FHA loan. If you need to raise your credit score then you can do the following:

 

  • Try and make use of only 30% or less of your available credit.
  • Pay your bills on time.
  • Keep your earlier accounts open even if you have stopped using them.
  • Do not take out new credit accounts.
  • If you come across any errors in your credit report, talk them over with your credit bureaus and creditors.

 

 

  • Check your debt-to-income ratio (DTI)

 

Lenders would want to be aware of your debt situation as compared to your income. This is called the debt-to-income (DTI) ratio. The better this ratio is, the better mortgage terms you receive. Mortgage lenders generally prefer DTI to be at most 36% – the lesser the better. Some types of mortgages also allow a DTI of 50%. You can pay off your debts or bring in more income to lower your DTI.

 

 

  • Your down payment

 

For a lender, an ideal down payment is 20% of the home’s purchase price. If you pay 20%, then you won’t have to pay private mortgage insurance (PMI), which is generally between 0.5% and 1% of the loan. However, sometimes 20% might seem to be too much of a stretch, based on the value of the house. Most of the first-time house buyers can put down less than 10%. FHA loans allow low payments, like 3.5%. Some Veterans Affairs (VA) mortgages also allow no down payment.

 

  • Pick the right mortgage type

 

You have enough options when it comes to mortgages. You have the option of choosing between a fixed-rate loan and an adjustable-rate loan. There are government-insured loans – VA loans and HFA loans and conventional (regular) mortgage loans too. Each can vary when it comes to interest rates, down payment needs and various other factors. Your mortgage lender will help you choose the best kind of loan that suits your situation.

 

  • Get Pre-qualified to get a mortgage loan

 

This is an informal procedure in which you have to answer the lender’s questions, based on how much you earn and your debts. Depending upon this information, the lender will assess if you qualify for a mortgage or not and if yes, then for how much amount.

The lender won’t verify your answers by checking out your credit report at this point and there is no guarantee that you will get the amount they say you will. However, this would essentially give you a better picture of what kind of homes you could purchase. Note that you don’t have to take the mortgage from the same lender who pre-qualified you.

 

  • Get pre-approved to receive a mortgage loan

 

If you are serious about getting a mortgage loan, then you will want to get pre-approved. You need to submit paperwork to verify your income stature, and other documents to detail your financial life. If you get pre-approval, then you can go to sellers and they shall consider you as a serious buyer. Pre-approval means that you are likely to receive the mortgage loan, it does not mean that you have got the loan.

 

  • Choose a lender and Apply

 

After you have chosen the home you want to buy and have your offer approved, then you can get official by applying for a mortgage loan. Compare the interest rates various mortgage lenders offer before choosing one. A small difference in the interest rate can save you a significant amount of money. You have plenty of options when it comes to lenders, like banks, credit unions, mortgage lenders, etc. You can also consult a mortgage broker who will find you the best mortgage out there, for a certain amount of fee. Applying for a mortgage will also need a lot of documents. Gather all your financial info and be prepared in advance. 

 

  • Closing on your house

 

If your mortgage loan application is approved then the next step is closing on your home. The mortgage will be deemed official the day you close. You will need to be prepared with the down payment. The closing costs are generally 2% to 5% of the total value of your home and you will be able to find out the exact amount on your closing disclosure, three days before the day of closing. There will surely be a lot of paper signing involved and after that, you will get the keys to your new house.

Today’s Mortgage and Refinance Rates

Product Interest Rate APR
Fixed Rates for 30 years 3.571% 3.767%
Fixed Rates for 20 years 3.375% 3.653%
Fixed Rates for 15 years 2.875% 3.201%
5/1 ARM rate 2.896% 3.342%
5/1 ARM jumbo rate 3.250% 3.603%
7/1 ARM rate 2.925% 3.235%
10/1 ARM rate 2.625% 3.270%
30 year fixed FHA rate 3.844% 5.005%
30 year fixed VA rate 3.825% 4.285%
30 year fixed jumbo rate 3.563% 3.654%
15 year fixed jumbo rate 3.252% 3.306%

 

 

What are today’s mortgage rates?

As of 13th March 2020, the average interest rate on the 30 year fixed rate mortgage is at 3.767%. The average fixed rate for a 15-year mortgage is 3.201%, and the average rate on 5/1 ARM (adjustable-rate mortgage) is 3.342%. The rates are called the Annual Percentage Rate (APR). 

 

The Federal Reserve and mortgage rates

Homebuyers sometimes misunderstand how the Federal Reserve affects our mortgage rates. They do not set the mortgage rates, rather they determine the federal funds rate which in turn impacts short-term and adjustable interest rates.

When the federal funds rate increases, it becomes more expensive for the banks to borrow from other fellow banks. These higher costs are passed on to the consumers by imposing higher interest rates on the lines of credit, auto loans and to a certain extent, mortgages.

So, the Federal Reserve indirectly affects the mortgage rates by bringing forth money policies that affect credit prices. The Federal Reserve has numerous tools to enable it to affect the monetary policy which includes federal funds rate, open market operations, and quantitative easing. In case the Fed wishes to boost the economy, then it implements policies to keep the mortgage interest rates low and if it wants to tighten the money supply then its policies result in higher mortgage interest rates.

For example, as a response to the global financial crisis of 2008, the Federal Reserve took up the very unusual step of launching a quantitative easing program where it brought Treasury bonds (which bought up mortgage-backed securities and government debt). This increased the money supply in the country’s financial systems. The banks were encouraged to lend money more easily. The price was driven up and the supply of securities was driven down. These actions led to keeping the lending rates and mortgage rates low.

 

How are mortgage interest rates determined?

Several factors determine the mortgage rates and some are under your control, such as your credit score, etc. However, several other factors are beyond your control. Let’s have a detailed look into these:

Mortgage Rate Factors under Your Control:

Lenders have to adjust the mortgage rates based on how risky the loan is judged to be. Riskier the loan, higher the interest rate. The lenders, while judging risk, consider how likely you are to fall behind on your due date of payments or stop making the payments and also how much money the lender would lose in such a case. The basic mortgage rate factors under your control are as follows:

 

  • Credit score: Borrowers with credit scores of 740 or higher receive the best mortgage rates. People with a credit score below 740 but greater than 700, have to incur a little higher interest rates. With credit scores in the range of 620 to 689, mortgage rates could be even higher. Such house buyers will find it almost impossible to receive a loan involving a high amount. If you have a credit score below 620, the interest rates get even higher and the options available are fewer, mostly insured loans or govt. guaranteed.

 

 

 

  • Loan-to-value ratio: This measures the mortgage amount in relation to the house’s value. Consider this, you buy a house that costs $100,000, pay $20,000 as down payment and get the rest $80,000 on the mortgage, then you are borrowing 80% of the value of your house. So, your loan-to-value ratio will be 80%. If it is greater than 80%, then that is considered to be high and generally puts the lender at a greater risk. This could lead to a higher mortgage rate, especially if your credit score is less as well. Such types of loans could even require mortgage insurance.

 

 

 

  • Other factors: Lenders could charge more for the cash-out refinances, adjustable-rate mortgages and loans on manufactured homes, second homes, investment properties, and condominiums because they are thought of as riskier.

 

 

 

Mortgage Rate Factors Not under Your Control:

The overall layout of the mortgage rates is set up by financial forces in the market. Mortgage rates can move up and down daily, depending on the expected and current rates of inflation, unemployment, etc.

 

  • Overall economy

 

Mortgage rates go up when the outlook is for fast economic growth, inflation is high and the unemployment rate is low. Mortgage rates tend to go down when the economy slows down, inflation is falling and the unemployment rate is high.

 

  • Inflation

 

In times of rising inflation, mortgage interest rates also tend to rise as when the prices go up, the buying power of the dollar is reduced. So, lenders demand higher rates of interest as a way of compensation. On the other hand, low inflation rates bring about low mortgage rates.

 

 

  • Other economic factors: The mortgage investors pay attention to economic trends like employment, retail sales, home sales, corporate earnings, housing starts, and stock prices.

 

 

 

  • Federal Reserve: The Feds don’t set the mortgage rate. They just raise and cut short-term interest rates in response to broad economic movements. Mortgage rates copy these and rise and fall in the same lines of these economic forces.

 

 

Compare Bank Mortgage Rates

 

  • Wells Fargo Mortgage Rates

 

Conforming and Government Loans

Product Interest Rate APR
30 Year Fixed Rate 4.250% 4.326%
30 Year Fixed Rate VA 4.125% 4.342%
20 Year Fixed Rate 4.125% 4.215%
15 Year Fixed Rate 3.375% 3.524%
7/1 ARM 3.5% 3.443%
5/1 ARM 3.5% 3.380%

 

Jumbo Loans (Amounts that go beyond the conforming loan limits)

Product Interest Rate APR
30 Year Fixed Rate Jumbo 3.625% 3.639%
15 Year Fixed Rate Jumbo 3.250% 3.275%
7/1 ARM Jumbo 2.875% 3.024%
10/1 ARM Jumbo 3.125% 3.139%

 

 

 

  • Bank of America Mortgage Rates

 

The following values are for a loan of $200,000 and a down payment of $50,000:

Product Interest Rate APR Points Monthly Payment
30 year fixed 3.750% 3.909% 0.338 $926
15 year fixed 3.000% 3.331% 0.701 $1,381
5/1 ARM variable 2.625% 3.123% 0.596 $803

 

 

  • Quicken Loans Mortgage Rates

 

Product Interest Rate APR
30-Year Fixed VA 4.25% 4.25%
5-Year ARM 3.5% 3.5%
30-Year Fixed 3.875% 3.875%
15-Year Fixed 2.875% 3.312%
30-Year Fixed FHA 4.25% 5.29%

 

 

  • Chase Mortgage Rates

 

Product Interest Rate
30 Year Fixed Rate 3.936%
15 Year Fixed Rate 3.227%

Difference between Mortgage Interest Rate and APR

Interest rate is 

  • Cost levied on the amount of money borrowed (principal loan amount). It can be fixed or variable, but it is always expressed in the form of a percentage.
  • Determined by the already existing rates, the borrower’s credit score, the market, etc. For instance, if your credit score is high, then you will be levied with a lower interest rate
  • The monthly payment will be based on the interest rate and principal amount, not the APR.

Annual Percentage Rate (APR) is 

  • A broad term that is the measure of the cost of a mortgage. It includes the interest rate and other costs like discount points, broker fees, and closing costs too, expressed in a percentage. 
  • Determined by the lender as it consists of the lender fees and other costs that are supposed to vary from one lender to another.
  • As per The Federal Truth in Lending Act, borrowers need to disclose the APR in their consumer agreements.

 

What will be the best mortgage loan type for you?

You need to understand your affordability and keep certain other points in mind to get the best mortgage loan. The right mortgage loan for you will depend upon your risk tolerance, your financial stability, and other economic conditions. Finding the mortgage that suits you best can be a challenging task since you are left with a lot of options. Here are the six steps you could try following to achieve the best mortgage loan for you:

 

  • Check how much you can afford:

 

Buying a house is a purchase involving a high amount of money and you probably might be wondering if you can afford all that. You need to have a decent credit score for lenders to put their trust in you. If you cannot provide a good credit score, then it would get riskier for the lenders to offer you a loan. 

 

  • Set a savings goal for your upfront cost

 

Mortgage lenders don’t want you to just qualify for a large amount of loan, they also want you to put aside some money in the bank for the down payment and closing costs as well. If you put down less amount at the time of the mortgage, then you could end up with a massive amount of loan. The house would then be worthy of less than the huge amount you owe.

 

  • Think about the length of your mortgage loan:

 

The phrase “30-year mortgage” might take you by a bit of surprise because that is a long term commitment. However, there are 10-year and 15-year mortgage loans available as well and some lenders can even offer varying lengths from anything in between 10 to 30 years.

 

  • Choose the right type of mortgage loan:

 

  • If you have a military connection, getting a VA loan would be better.
  • If you wish to live in a rural or suburban area, a USDA loan should be your pick.
  • If you have a lower credit score, go for FHA loans
  • If you are buying a house that is more expensive than the standard loan guidelines, then go for Jumbo loans.
  • If you wish to own a home for just a few years, go for an adjustable-rate mortgage. These have lower interest rates initially.
  • If you want a home for many years and if the interest rates are high at the time of purchase, then consider getting an adjustable-rate mortgage loan. It has a lower interest initially. When the rates decline over time, you can refinance to a fixed-rate mortgage.
  • If you want to own the house for a long time and the interest rates are low, then get a fixed-rate mortgage. That way, the low rate will stay locked for the entire lifetime of the loan.

 

  • Know the working of mortgage interest rates

 

The interest rates for mortgage loans fluctuate a lot in the market. But you can lock in on your chosen interest rate for the entire period of the loan. So, choose the mortgage which has low-interest rates at the time of your purchase.

 

Pros and Cons of Different Loan Types

Fixed-Rate Mortgages

Products Pros Cons
Conventional Fixed Rate Loan
  • Does not suffer when the market rates rise
  • The P&I payment is predictable
  • Does not benefit from the fall of market rates
  • The initial rates are higher than ARM
Fixed-Rate Balloon
  • It does not suffer when the market rates rise.
  • The P&I payment is predictable
  • It does not benefit from the fall of market rates.
  • The initial rates are higher than ARM
  • Might need refinancing to pay off the balloon
  • The rates at payoff might seem unattractive.
Interest-only Loan
  • It does not suffer when the market rates rise.
  • The P&I payment is predictable.
  • The monthly payments are lower
  • It does not benefit from the fall of market rates.
  • The initial rates are higher than ARM
  • It is a must to refinance, repay or renew early
  • There shall be no reduction via amortization.
Bi-weekly loan
  • It does not suffer when the market rates rise.
  • The P&I payment is predictable
  • The payments are smaller
  • If you can squeeze in the equivalent amount of a 13th monthly payment, then you could pay off the loan faster. 
  • It does not benefit from the fall of market rates.
  • The initial rates are higher than ARM
  • More payments per annum

 

Adjustable-Rate Mortgages (ARMs)

Type of Mortgage Pros Cons
Standard ARM
  • Payments decrease when the market rates fall
  • The initial rate will be lower than the fixed-rate
  • Payments can increase when the rates increase
  • Payments can change over time, so there is no stability
Convertible ARM
  • Payments decrease when the market rates fall
  • The initial rate is will be lower than the fixed-rate
  • You can lock in low rates if rates happen to fall
  • Payments can increase when the rates increase
  • Higher initial rate than the standard ARM
  • There is no stability and the payments vary with the market
  • You must pay the fee to lock-in
Two-step Mortgage
  • The initial rate will remain fixed for some time
  • Payments decrease when the market rates fall
  • The initial rate will be lower than the fixed-rate
  • Payments will fluctuate with market
  • Payments will increase with rising rates
  • Somewhat risky as the future rate remains unknown
Balloon ARM
  • Payments decrease when the market rates fall
  • The initial rate will be lower than the fixed-rate
  • Payments can fluctuate one time with market
  • Payments increase when the rates rise
  • Is somewhat risky since the future rate is not known
Interest-only ARM
  • Payments decrease when the market rates fall
  • Lower monthly payments
  • Payments increase with increasing rates
  • There is no stability, payments vary with the market
  • It cannot reduce the principal loan amount
Graduated Payment Loan
  • Lower monthly payments initially
  • Payments keep increasing with time
  • You might have to face negative amortization in the early years
  • Lenders could charge a premium

 

The Right Time to Get a Mortgage Loan

Every lender has a very regular monthly cycle when it comes to business. So, compensation drives a lot of this cycle. The best time to start your mortgage loan application is always in the very first few business days of the month. 

The beginning of the month is devoted to gaining and setting up new loans, the middle of the month is about collecting documents and getting the loans ready for month-end and the end of the month is where there is a mad rush to get the maximum loans closed. Hence, the beginning of the month is the time when the lenders are hungry for new business. They have been through the push during the last month and are now willing to build a good new month. You will find that the loan officers and processors are very interested in returning your phone calls and are eager to carefully negotiate the options and terms with you.  

Also, the right time would be when you have enough money saved up for the down payment and a credit score that will allow you to comfortably pay the monthly mortgage payments.

 

How much can I borrow for a mortgage?

Mortgage lenders use several debt-to-income ratios to determine how much a person can borrow for a mortgage. 

  • Front-end Ratio: The percentage of your gross annual income that is utilized to pay the monthly mortgage payment is known as the Front-end ratio. You should know that four components make up the mortgage payment, these are: interest, principal, insurance, and taxes. The general rule states that these items should not exceed 28% of the borrower’s gross income, although some lenders do allow the borrower to exceed 30% and some even 40%.
  • Debt-to-Income Ratio: The debt-to-income ratio aka Back-end-Ratio finds out the percentage of income needed to pay your debts. This figure should not exceed 36% of your gross income. 
  • Down Payment: Many lenders need a down payment of about 20% of the purchase price of the home. This would minimize the PMI requirement, but lenders also accept lower down payments. That would mean that your interest rate will become higher.

The borrower should also decide upon their capability to pay monthly mortgage payments and down payments before fixing an amount to borrow.

 

How do I find the best mortgage rate?

Here are some tips to get the lowest/ best mortgage rates:

  • Work on your credit score (Improve it)
  • Save for your down-payment
  • Think about how long you are going to stay in your new house. If you will not stay for long, then go for ARM since they offer lower rates initially and if you want to stay there for a long time, then choose a fixed-rate mortgage.
  • Try getting the mortgage when the interest rates are low in the market.

 

How do I choose a mortgage lender?

These three tips will help you in finalising the suitable lender:

  • Research about the lender, dig in as much as you can. Go through the annual mortgage lender customer satisfaction surveys. 
  • Compare the rates offered by various lenders and choose the best that suits you.
  • Ask friends and family about the way they are treated and about their experiences with lenders.
  • You need to feel comfortable with the lender because this might be the most essential decision of your life. So, if you ask for information and don’t receive it quickly, then that is a red flag. 

 

Already own a home and want to refinance?

A mortgage refinance replaces your ongoing house loan with a new one. People often refinance to enjoy a lower interest rate, cut on their monthly payments or look into their home’s equity. Some also get a refinance to repay their loan faster, get rid of their FHA(Federal Housing Administration) insurance or switch an ARM(Adjustable Rate Mortgage) to a fixed-rate mortgage loan.

Refinancing Step-by-step:

 

  • What is your goal? Find out if you wish to reduce your monthly installments, shorten your loan tenure, and be done with FHA mortgage insurance or something else.
  • Compare the refinance rates and keep an eye on fees as well.
  • Apply for the refinance mortgage with around 3 to 5 lenders. Submit all the documents within a 2-week time-frame to reduce the impact on your credit score.
  • Choose the best refinance lender. To do this you need to compare the Loan Estimate document each lender provides after the application. This will let you know the amount of cash required for closing costs.
  • Lock the interest rate. When you see that the ongoing interest rate is favorable for you, lock it. When you do so, it cannot be changed for a certain time. Try to close the loan before the rate lock gets expired. 
  • Close on the loan. This is where you need to pay the closing costs.

 

 

Get pre-approved

 

  • What is a mortgage pre-approval and why is it so important? 

 

A mortgage pre approval is an offer made by a mortgage lender to loan you a specific amount of money under certain terms. With this, the lender will pull out your credit report and verify the document to know about your income, assets, and debts.

Mortgage pre-approval is important because it allows taking the burden off your shoulder and makes the mortgage procedure a smoother one. This is a crucial step in the entire house buying procedure. Pre-approval gives you an idea of how much you can borrow, it will also let the lenders be transparent about your borrowing power. It helps you know the purchase price you are qualified for, so you don’t look at homes outside your affordability. Besides, having a mortgage pre-approval letter lets the seller know that you are a qualified buyer and are serious about buying a home.

You need to provide the following documents for pre-approval:

  1. Income Proof
  2. Proof of Assets
  3. Credit Report
  4. Employment Verification
  5. Other documents

 

 

  • What is the difference between pre-qualification and pre-approval?

 

A mortgage pre-qualification can be thought of as an informal evaluation of your financial stature. This provides you with an estimate of your borrowing power. On the other hand, the pre-approval is also more than just an estimate. It is an offer made by a mortgage lender stating that he would loan you a specific amount of money.

 

 

  • When should I get pre-approved for a mortgage?

 

After you have settled down on the home you wish to buy, have made your down payment ready, then it would be a good time to get pre-approved for a mortgage and choose a lender thereafter.

 

 

  • How long does a mortgage pre approval last?

 

A pre-approval letter lasts for about 90 days.

 

 

  • Why should I get pre approved by multiple lenders? 

 

You should contact more than one lender for pre-approval. This will help you compare lenders, find the right financial partner to work for your situation, and could save you money. 

 

  1. Will getting pre approved by multiple lenders hurt my credit score?

Applying for pre-approval from multiple lenders will not hurt your credit score.

 

Calculate your mortgage

 

  • How to calculate your mortgage payment

 

You can make use of an online  monthly mortgage payment calculator to get an estimate of your mortgage payment.

 

  1. What’s included in a mortgage loan calculator?

The mortgage loan calculator generally takes in your principal amount, interest rate, property taxes, and homeowner’s insurance, PMI, and give you an estimate of your monthly mortgage payment. Some calculators even take in your credit score range, zip code, and HOA to provide you with a more accurate monthly payment estimate.

 

Get your free credit score

You are allowed to have one free credit report every year from the three main credit bureaus of the US- Equifax, TransUnion, and Experian. These can be accessed online at AnnualCreditReport.com. Some banks like Chase also offer free credit score service. Many online credit score calculators can give you your credit score for free.

 

Estimate your home value

Knowing your home’s value helps you stay prepared for buying, selling, refinancing or tapping into home equity or negotiate low property taxes. Here are the ways to find out the value of a home:

  1. Make use of online valuation tools
  2. Get a comparative market analysis
  3. Make use of the FHFA House Price Index Calculator
  4. Hire a professional appraiser to find your home’s value.
  5. Evaluate the prices of your comparable properties.

 

Repaying a Mortgage: What Is Included?

The repayment of a mortgage consists of monthly payments which include the following four components:

 

  • Principal 
  • Interest
  • Taxes
  • Insurance

 

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