Are you Mortgage Rate Shopping? Did you know that Freddie Mac reported that shopping around to secure the best mortgage rate can save homeowners an average of $1200 a year in interest alone? Consequently, financial experts recommend that homebuyers shop mortgage interest rates and loan terms upfront before signing. Considering the popularity of the 30-year fixed-rate mortgage, homeowners who save themselves $1200 per year in interest by securing the lowest interest rate will ultimately save $36,000 throughout the life of the loan. I don’t know about you, but there are about thirty-six thousand things I’d rather spend money on than interest payments.
Find a trustworthy mortgage lender.
The lender is one of the most significant considerations for financing a new home. Just as finding the perfect real estate agent makes homebuying a breeze, so too is finding a lender with expansive mortgage offers and a passion for optimizing their client’s dollar. Don’t avoid big commerce, including large banks or online lenders. Additionally, mortgage brokers and credit unions are exceptional options for mortgage rate shopping. Finding the right lender is crucial; here are some pro tips for any borrower, from first-time home buyers to homeowners looking to refinance home equity and secure a refinancing loan. Here is the ultimate guide to shop rate quotes and lock in the type of mortgage borrowers dream of.
Rate shopping is undoubtedly worth the effort no matter the loan amount; however, there are a few considerations to keep in mind. Firstly, buyers need to safeguard their credit score. Since underwriting will scrutinize personal finances and use credit scores as collateral proof of a potential borrower’s financial situation, hard-hit credit checks are big no-nos. FICO scores directly impact loan options, and the better a borrower’s credit is, the lower interest rate options will be.
Best Practices
As a rule, borrowers must avoid loan applications for credit — car loans, credit cards, or any other type of loan surrounding the homebuying timeframe. Buyers should avoid all credit inquiries for other financed purchases when buying a home. Experian, Equifax, and TransUnion are the three heavy hitters regarding credit bureaus, and underwriting will be looking for any inquiries from them.
Since auto loans, credit cards (store credit cards), and consumer loans will all subtract funds and make less money available to make monthly mortgage payments, they have a significant impact on loan approval. The rule of thumb for loans is to borrow money that always gets paid down, such as mortgage loans and auto loans. In contrast, credit card applications imply an expansion of money borrowed; therefore, these credit checks cripple a borrower’s credit score.
Use savings wisely
Understandably, saving money is optimal, especially for down payments, closing costs, and origination fees; however, different lenders offer different loan terms and qualification criteria. For example, FHA loans often require much less money upfront, as do VA loans and USDA loans. Usually, the benefit of using saved funds to pay off high-risk debts like credit cards and defaulted medical bills may provide a much higher value than a high down payment. Since interest is the most considerable portion of a home loan, securing the lowest rate possible is crucial.
Down payments, taxes, and insurance
Speaking of down payments, there are countless online mortgage calculators that can provide a rough estimate for down payment options. Homeowners wanting to avoid private mortgage insurance (PMI) will need 30% as a down payment. Frequently, lenders need to clarify homeowners insurance and PMI. PMI protects the money associated with lending on a property, and homeowners insurance protects the property and the home assets.
The Federal Housing Administration requires homeowners to carry private mortgage insurance on their properties throughout the life of the loan since funds from the Federal Reserve back the property. Many other loan options allow homeowners to drop PMI once they reach 80% home equity.
Property taxes are required for every property and vary based on location. When shopping for a loan, many borrowers budget property taxes to their monthly mortgage payments. Since a tax default often results in a lean on the property, promptly paying taxes is critical.
Mortgage discount points and mortgage rate locks
Discount points allow buyers to lower their monthly payments and interest rates on their property. One mortgage point is equal to one percent of the loan value. For example, if a buyer buys a home for two hundred thousand dollars, one point would be two thousand dollars. Typically, payment on discount points is upfront, allowing buyers to buy down their interest rate.
Mortgage rate locks allow borrowers to lock their interest rate upfront before fully closing. Commonly, the best mortgage lenders can anticipate a mortgage interest rate spike and preemptively assist their clients in securing an optimal rate beforehand.
The trick to mortgage rate shopping is to shop carefully.
Indeed, it’s true that shopping for a lender is essential, but there’s a right way to do it. Whenever a borrower applies for a home loan, a lender makes a credit inquiry. Underwriters review credit history to ensure the fiscal responsibility of a borrower. Any credit queries are reported to the three large agencies we already mentioned. Those inquiries indicate that the applicant may be taking on new debt. Usually, a flurry of credit checks from various mortgage lenders means a minor but negative hit to credit scores. But there’s a workaround.
The 45-Day Rule
The Consumer Financial Protection Bureau advises buyers to do all rate shopping within 45 days. To break it down, when credit is run multiple times within 45 days for the same type of loan, they are recorded as one inquiry on a credit report. To break it down, underwriting can clearly see that a borrower is not applying for several mortgages within a 45-day timeframe; the inquiries are to secure one home loan.
With this intention, home buyers can perform their due diligence and get multiple pre-approvals and official loan estimates. No matter how many lender consultations, the impact on credit scores will be the same. Remember that this 45-day rule only applies to credit checks from mortgage lenders or brokers — other inquiries are processed separately and should be avoided entirely through the mortgage approval and homebuying timeframe.
Loan terms that allow borrowers to optimize their loans
Fixed-rate mortgages vs. adjustable-rate mortgages
Also known as traditional mortgages, the fixed-rate loan carries a set interest rate. Commonly, the loan terms are between 10 to 30 years (some loan offers come with longer or shorter duration). Often, these loans are ideal for a homeowner who needs payment stability. Ultimately, the longer the period of time a homeowner pays, the lower their payment will be. Keep in mind the longer the term, the more interest is paid.
In simple terms, an adjustable-rate mortgage is also called a floating-rate or variable-rate mortgage. These loans have interest rates that will fluctuate based on an index. Predominantly, buyers will see loans with a two or five-year fixed term. The interest rate will stabilize for two or five years, and then the loan will follow the ARM index (plus a margin of additional interest), which resets each year following current mortgage rates. These loans are optimal for buyers looking to relocate within the fixed term of the loan or for homeowners who plan to rehab the property and refinance once the ARM index sets in since adjustable-rate mortgages usually offer more favorable interest options.
APR and interest rates
These terms are often conflated, yet they serve different purposes. In a nutshell, the interest rate is the amount a buyer agrees to pay for the loan’s principal balance. The annual percentage rate (APR) is the (typically higher) interest rate that pays for the additional costs of the loan. Remember, credit is vital when considering homebuying. The better the credit, the less a borrower will pay (sometimes zero) in APR.
Choosing a lender
The most significant step in the home buying process is teaming with trustworthy professionals who are equipped and ready to deliver. Asking lenders questions is an excellent start to understanding how they work. Ask them about closing timelines and how loans are approved. Surprisingly, a borrower can learn a lot in a short period of time when they come prepared and ready to do business. Ask potential lenders what costs and fees are associated with each loan product and if they offer discounts. Ultimately, loan processing timeframes are expedited and seamless when both parties prioritize effective communication, so buyers need not be afraid to share thoughts or ask questions.
Let’s start Mortgage Rate Shopping.
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your lending needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the mortgage application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
