Folks, let’s talk about mortgage rates. Mortgage rates have a big impact on the overall long-term cost of purchasing a brand new home through financing.
More diligent and discriminating borrowers will always try to get the most favorable mortgage rates possible for their home loan. Meanwhile, mortgage lenders– banks, brokers, and other financial institutions– will always try to manage their risk as best they can, and their interest rates (as well as terms and conditions) will reflect that.
Over the span of a typical 30-year mortgage, it is likely that you’ll end up paying more in interest than you actually owe in terms of principal. In this way, your mortgage rates factor in considerably on what it will actually cost you to own your home– how much more over the original price of the property.
For this reason, understanding how mortgages work, what influences mortgage rates, and how you can work towards more favorable interest rates can undoubtedly help you secure a better deal and save money on your monthly mortgage payments.
Topics we’ll be covering in this guide include:
- What is a mortgage?
- What are mortgage rates?
- Mortgage terminology
- What causes mortgage rates to go up or down?
- The Federal Reserve and mortgage rates
- Fixed-rate and Adjustable-Rate mortgages: what’s the difference?
- The upfront costs of buying a home
- Mortgage brokers vs. Banks
- Which lenders have the best mortgage rates?
- Is 3.99 a good mortgage rate?
- Can I negotiate my mortgage rate with the bank or lender?
What Is a Mortgage?
For many adults, buying a home is going to be one of the biggest financial commitments they’ll likely make in their entire lives. Right up there with saving up for college, purchasing a car, getting married, or starting a business, purchasing a home will require quite a bit of money.
Ideally, it’s best to purchase a brand new home with cash. Now, the reality is that most of us aren’t cash-heavy nor do we have that sort of money just lying around. So in order to acquire a home, most people must loan that amount via a mortgage.
In essence, a mortgage is a loan. But unlike say, a car loan or credit card debt, a mortgage is loaned against a piece of real estate. In this case, the home you’re just about to buy serves as collateral for this particular loan.
And that’s what it is: a mortgage is a secured loan. secured by real estate— usually your home or property– as collateral.
Part of your agreement includes paying back your mortgage with a predetermined set of payments, and if for some reason you are unable to keep up with those payments, your lender can take the property you put up to secure the loan.
For purposes of this discussion, let’s say that the new home you’re eyeing for yourself costs $200,000.00. If you had that amount of money, all you have to do is hand it over to the seller of the home, and they hand you the keys. Essentially that’s it– congratulations, you’re the proud owner of a new home!
Then again, maybe you only have about $40,000.00 saved up– that’s about 20 percent of the cost of the property. Thanks to modern-day financing, a bank (or some other financial institution) can then lend you the rest via a mortgage, allowing you to pay off small fractions of the loan (plus interest) spread out monthly for 25 or maybe even 30 years.
What Are Mortgage Rates?
Just as loans have interest rates, so too do mortgages.
As mortgages are secured loans, your lender– in this case, the bank– can now offer you a low interest rate. And these are your mortgage rates— which should be at a fairly low, from about 3% to 5%. Compared to credit card debt or interest you might rack up with a car loan, these interest rates are actually quite favorable.
That’s the upside to it: your mortgage has comparatively low interest rates because the loan is secured. The downside to it is: if you fail to repay or keep up with your agreed repayments, the bank reserves the right to seize your property and sell it and use the proceeds to repay the loan.
Let’s go back to our original example: you’re about to purchase a $200,000 home by shelling out $40,000 in down payment, and getting a $160,000.00 loan from the bank.
- The $40,000 represents your equity in the property. This is the percentage of the home you own from money you’ve already paid. In this case, your equity is 20%. As you fulfill your payment obligations, your equity goes up, until you hit 100%– at which point, you now fully own your home.
- The $160,000.00 loan from the bank is your mortgage. As payment for the service of providing you with the loan, you also pay the bank a bit of interest each month, which now represents your mortgage rates.A lot of factors come into play when determining your mortgage rates, which are tacked on to your monthly payments so that you’re paying off a little bit of the loan principal each month.
- Your loan-to-value ratio, or LTV, is expressed as a proportion of the value of the property. In this case, your $160,000 loan against your $200,000 value property gives you an LTV of 80%. Basically, the higher your LTV, the harder it is to get the loan. Generally, an LTV ratio of 80% or lower is considered good for most mortgage loan scenarios. An LTV ratio of 80% provides the best chance of being approved, the best interest rate and the greatest likelihood you will not be required to purchase mortgage insurance. (Source: Investopedia)
- A scenario might happen when home values can suddenly drop– perhaps due to market conditions or the economy.Let’s just say you managed to secure a loan for your $200,000 home by only shelling out $10,000.00. That means you have a mortgage of $190,000.00, an LTV of 95%, and equity of 5%.If for some reason the value of your home suddenly drops to $180,000, you’ve now found yourself in a scenario where the full value of your home can’t even cover the loan you got from the bank. Now, while your mortgage is still at $190,000.00, you now have an LTV of 108.33%, and equity of -8.33%.
In this case, you are now considered underwater, or having negative equity in your home.
What Causes Mortgage Rates to Change?
Mortgage rates can fluctuate from day to day, with several factors driving rates either higher or lower.
Inflation is the rate at which prices for goods and services rise, and fluctuate based on economic activity. Higher inflation usually means higher mortgage rates, while lower inflation usually means lower mortgage rates.
Basically, bad economic news is associated with lower interest rates while good economic news means we’re most likely to see higher interest rates.
Traditionally the Ten-Year Treasury is the best indicator whether mortgage rates will rise or fall. If the Ten-Year Treasury goes up, you can expect mortgage rates to rise. If it instead goes down, expect mortgage rates to follow suit.
The Homebuyer Market
Mortgage rates are also dictated by current supply and demand, just as in any industry. When there’s a high demand for homes or when there are more mortgage applicants from the existing pool of homebuyers, it usually drives prices up.
So when lenders are busy, rates tend to go higher. When business slows down, rates typically go lower.
Your Personal Finances
The biggest factor determining your interest rate is your credit score. Actively work to raise your credit score and you could get a more favorable interest rate. When your credit score isn’t doing so well, you will get a higher mortgage rate.
Another factor is the amount you put into down payment. Lenders believe it’s less risky to loan you money when you have more invested in the property (i.e. you’ve managed to shell out more by means of a larger down payment). A larger down payment typically means a lower interest rate and vice-versa.
Your Choice of Loan or Property Type
Mortgage rates can also vary according to the type of loan you may want to get or the type of property you’d like to purchase.
Typically, you can get a lower interest rate with an adjustable rate mortgage (an ARM) than you would if you had a fixed-rate mortgage, but an ARM may increase over time. Generally, a shorter term loan has a lower interest rate than a loan with a longer term. (See fixed-rate mortgages and adjustable-rate mortgages below.)
The type of property you wish to purchase affects your interest rate as well. Primary homes typically qualify for the lowest rates, whereas other properties have a higher
rate because they create a greater risk to the lender.
The Federal Reserve And Mortgage Rates
As home values in the United States have been on the rise, there are many considering purchasing a home for themselves, while there are also others opting to just rent in the meantime.
For serious buyers doing due diligence, they also keep track of current mortgage rates; more specifically, if and when the Federal Reserve decides to raise or lower interest rates.
In 2018, for example, the Federal Reserve raised its benchmark interest rate four times, and that was following three rate hikes in 2017.
Especially for first-time homebuyers anxious to make that first purchase, anything that might change the affordability of homeownership– such as a sudden jump in interest rates– might cause them to delay their decision to buy a house (and opt to continue renting instead).
While there’s certainly a correlation between the Federal Reserve and current mortgage rates, exactly how does rising interest rates affect current home prices?
How Does The Federal Reserve Affect Mortgage Rates?
First things first: the Federal Reserve doesn’t actually set mortgage rates. Instead, they determine the federal funds rate, and this has an impact on short-term and variable (adjustable) interest rates.
The federal funds rate is the rate at which banks and other financial institutions lend money to one another overnight to meet mandated reserve levels.
The higher the federal funds rate, the more expensive it is for banks to borrow from other banks. These higher costs are then passed on to the consumers, affecting interests on lines of credit, auto loans and– to some extent– mortgages.
This is how the Federal Reserve monetary policy affects mortgages. However, it is important to note that mortgage rates are also affected by other factors, such as the buying and selling of government securities such as bonds.
Higher Mortgage Rates Mean More Costly Home Loans
Let’s say you’re looking at a $200,000 30-year mortgage at a 4 percent interest rate. Using a readily available mortgage calculator online, a mere one percent increase in the rate can raise your monthly payment by $119.
As you can see, the smallest bump in mortgage rates can have significant effects on how much homebuyers are expected to shell out. Higher interest rates means that getting a home loan will certainly cost you more.
A smaller pool of potential homebuyers due to more expensive home loan costs means there’s an additional demand for rental properties, potentially driving rental costs up.
High Interest Rates Might Drive Home Prices Down
We now know that higher interest rates simply means that your monthly mortgage payments also go up.
As the higher interest rates make mortgages less affordable on a monthly basis, the prospect of buying a house at these rates might turn off some buyers, thus causing the existing pool of home buyers to shrink.
Those selling homes would feel the pinch; less people would make offers to buy the homes up for sale. So in order to attract buyers, some of these sellers might choose to drop their prices.
In a way, it’s a consolation of sorts for buyers worried about meeting the price of a home they’re eyeing to purchase. Even when interest rates go up, there are still opportunities available as sellers bring down their prices in response to market conditions.
What’s The Difference Between a Fixed-Rate and an Adjustable-Rate Mortgage?
The two primary mortgage types are your fixed-rate mortgages and your adjustable-rate mortgages (ARMs). Each of the two might have variations of sorts, but ultimately, when you’re shopping for a mortgage, the first step is to figure out which of these two main loan types best suits your needs.
To keep this simple, we’re just going to focus on two different kinds of mortgages: a fixed-rate mortgage and an adjustable rate mortgage.
A fixed rate mortgage is exactly what it sounds like: it’s a mortgage that keeps the same rate for the entire life of the loan– typically 15-, 20-, or 30-year terms
Although the amount of principal and interest paid each month varies from payment to payment, the total payment remains the same, which makes budgeting easy for homeowners.
So let’s say you take out a thirty-year fixed-rate mortgage with a $2,000 monthly payment. This year you’ll still be making that same payment of principal and interest ten, 20, and 30 years down the line.
The main advantage of a fixed-rate loan is that you are protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise. Generally, fixed-rate mortgages are easy to understand and vary little from lender to lender.
The downside to fixed-rate mortgages is that when interest rates are high, qualifying for a home loan is more difficult because the payments are less affordable.
Although the rate of interest is fixed, the total amount of interest you’ll pay depends on the mortgage term. Traditional lending institutions offer fixed-rate mortgages for a variety of terms, the most common of which are 30, 20, and 15 years.
The 30-year mortgage is the most popular choice because it offers the lowest monthly payment. However, the trade-off for that low payment is a significantly higher overall cost, because the extra decade, or more, in the term is devoted primarily to paying interest.
Monthly payments for shorter-term mortgages are higher so that the principal is repaid in a shorter time frame. Also, shorter-term mortgages offer a lower interest rate, which allows for a larger amount of principal repaid with each mortgage payment. Thus, shorter term mortgages cost significantly less overall.
Then there are adjustable rate mortgages also known as ARMs. These mortgages have interest rates that can change depending on market conditions, meaning that your monthly payment can go up or down.
The most popular type of ARM taken out today is a fixed period arm also known as a hybrid ARM. They’re based on a 30-year term and typically start with an initial fixed interest rate for a specific period of time– usually five, seven, or ten years.
For example, a five-year ARM will be referred to as a 5/1 ARM and its interest rate will stay the same for the first five years.
Because the interest stays the same for five years the monthly payment of principal and interest will also stay the same for this time period. But after that fifth year, the loan resets, and the interest rate is now subject to change annually for the remaining 25 years left on the mortgage.
You also have the 7/1 ARM and the 10/1 ARM, whose interest rates will stay the same for the first seven and ten years, respectively.
The rate will change based upon changes in the current financial market, and that means that your monthly payments will change based on the interest rate applicable at the time of adjustment. So make sure that you’re prepared to make higher monthly payments if interest rates rise.
Which of These Loan Types is Best For Me?
When choosing a mortgage, you need to consider a wide range of personal factors and balance them with the economic realities of an ever-changing marketplace. Individuals’ personal finances often experience periods of advance and decline, interest rates rise and fall, and the strength of the economy waxes and wanes.
Asking yourself some key questions can help you figure things out.
- Do you want the predictability of knowing what your principal and interest payments will be year after year?
- Are you planning to stay in your home for a long period of time?
- Do you want protection from rising interest rates in the future?
If you answered “Yes” to any of these questions, a fixed-rate mortgage may offer you the stability and predictability you need. This is particularly the case if this home is where you plan on raising your family or retiring.
And now a few questions to help see if an ARM offers what you need:
- Is this a starter home or one that you aren’t planning to stay in for a long period of time?
- Do you believe that interest rates might go down in the future?
- Will you be able to afford your payment’s when the fixed rate period is over and the rate resets and possibly goes up?
Now if you answered “Yes” to any of those questions then an ARM might give you the biggest bang for your buck in the short term.
That’s because many times the interest rate during the fixed period of a loan will be lower than what you typically get with a fixed-rate loan.
If you are considering an ARM, you should run the numbers to determine the worst-case scenario. If you can still afford it if the mortgage resets to the maximum cap in the future, an ARM will save you money every month.
Ideally, you should use the savings compared to a fixed-rate mortgage to make extra principal payments each month, so that the total loan is smaller when the reset occurs, further lowering costs.
If interest rates are high and expected to fall, an ARM will ensure that you get to take advantage of the drop, as you’re not locked into a particular rate. If interest rates are climbing or a steady, predictable payment is important to you, a fixed-rate mortgage may be the way to go.
More Upfront Costs of Buying a Home
We’ve already discussed mortgage rates, and how market conditions, government policies, and your financial standing can affect these, which in turn, affects home prices.
When purchasing property, however, take note that aside from your monthly mortgage payments, there are other upfront costs and out-of-pocket expenses to consider as well.
The Down Payment on Your Home
One of the biggest misconceptions for a lot of people is that you need to put down 20 percent of the house cost as down payment if you’d like to purchase a home.
Which means if you’re looking at a $200,000 property, you’ll need to shell out $40,000 to get the ball rolling– and that amount might be a bit steep for some buyers to begin with.
However, just because you don’t have enough saved up right now doesn’t mean you don’t have options available to you. There are government programs that allow you to move forward with owning a home with a significantly lower down payment requirement.
- FHA loans: These are backed by the Federal Housing Administration and allow qualified buyers to purchase a home with as little as 3.5 percent down.
- USDA loans: The U.S. Department of Agriculture offers mortgage loans that require no down payment at all. These loans are available to eligible buyers who purchase qualified properties in rural areas.
- VA loans: This is another no down payment mortgage option that’s designed for qualifying veterans.
Getting a home loan is just the first step; settling the closing costs is another item you need to consider. Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction.
Closing is the point in time when the title of the property is transferred from the seller to the buyer. Closing costs are incurred by either the buyer or seller. (Source: Zillow)
You can expect your closing costs to run between 2 and 5 percent of your home’s purchase price. Fees included in your closing costs will include:
- Application Fees
- Appraisal Fees
- Attorney Fees
- Closing Fee or Escrow Fee
- Courier Fee
- Credit Report
- Escrow Deposit for Property Taxes & Mortgage Insurance
- FHA Up-Front Mortgage Insurance Premium (UPMIP)
- Flood Determination or Life of Loan Coverage
- Home Inspection
- Home Owners Association Transfer Fees
- Homeowners’ Insurance
- Lender’s Policy Title Insurance
- Lead-Based Paint Inspection
- Loan Discount Points
- Owner’s Policy Title Insurance
- Origination Fee
- Pest Inspection
- Prepaid Interest
- Private Mortgage Insurance (PMI)
- Property Tax
- Recording Fees
- Survey Fee
- Title Company Title Search or Exam Fee
- Transfer Taxes
- Underwriting Fee
- VA Funding Fee
Other Costs of Owning a Home
Ideally, you should still have some savings left over after your initial down payment and closing costs.
- Moving and Relocating. There are costs associated with actually moving into your new home, and that includes you and all your stuff.
- Repair and Fixing. It’s possible that your new home might need a little bit of repairing and fixing up. Make sure you have enough funds to cover these expenses.
- Furnishing and Design. In the event you’ll want to do some renovating, redesigning, and other custom work on your property, you’ll have to factor these in as well.
- Monthly Upkeep. You’ll also want to have a bit of an allowance for anything related to ensuring your home is in top shape, and that would include utilities, cleaning, and other preventative maintenance work.
Mortgage Brokers vs. Banks: What’s The Difference?
There are a number of ways to get a mortgage, but two of the most likely channels you’re acquiring one is either via a mortgage broker or via a bank.
Working as middlemen between banks or mortgage lenders and borrowers, mortgage brokers actually account for more than 10 percent of all processed home loans. (Source: The Truth About Mortgage)
In fact, their share of the mortgage pie may have been as high as 30 percent just before the mortgage crisis of 2008.
Brokers today remain as an important part of the industry, providing much-needed assistance for homeowners as well as for those looking to refinance their mortgages.
Most homeowners turn to banks when it’s time to apply for a mortgage. They are, after all, the most obvious choice, and in most cases, loan services are already being offered at the customer’s home bank.
Because of the level of trust and engagement they already have with customers, banks are the easiest answer for those looking to get a mortgage.
Not all borrowers might qualify for a mortgage, however, as they may have complicated or less-than-ideal financial situations. Also, some banks might not be adept at handling more specialized mortgage applications. In these cases, mortgage brokers might be of better assistance to these outlying homeowners.
Advantages and Disadvantages of Working With a Bank
One of the best things going for you when coursing your mortgage application through your bank is that you’re working with an existing relationship. In this case, you’ll likely already know who might be processing your loan, and if you’re lucky, you might even get more favorable rates.
To make things easier for you, they can even add your mortgage to your existing file, and link your accounts to facilitate automatic payments for your convenience.
On the downside, most banks might not be equipped to handle anything outside the more conventional loan programs. If you’re dealing with customer service types or more general bankers, they might not be as familiar with all available options compared to a more specialized mortgage professional.
Some mortgage applications through banks might be a lengthy, bureaucratic process. Also, if you haven’t made the effort to shop around, you might find their rates higher just because they’re more convenient.
Advantages and Disadvantages of Working With a Mortgage Broker
Probably the biggest benefit of coursing your home loan through a mortgage broker is that you get more options because they work with a variety of banks and lenders.
They can do all the legwork for you, essentially helping you compare wholesale mortgage rates from all these different banks and lenders. This way, they may have solutions for homeowners who might not qualify through more conventional means (such as when applying via a bank).
On the other hand, you might end up paying more as they do provide a highly specialized service. Also, not all might have the same access to programs with select banks– approval might depend on their experience and relationships with these various lenders.
Which Lenders Have The Best Mortgage Rates?
As far as mortgages go, you now have a good number of lenders available today. Traditionally, you might have coursed your home loan application via your neighborhood bank or some other mortgage broker or a local lender.
Thanks to the internet and more modern banking regulations, more options are now available as you now have access to more nationwide lenders online.
In fact, The Balance has put together a list of recommended mortgage lenders, covering a variety of needs and requirements:
- Busey Bank: Best Traditional Bank Mortgage for Customer Service
- Chase: Best Traditional Bank
- Citi Mortgage: Best for Low Income
- Guaranteed Rate: Best Interest-Only
- Lenda: Best for Customer Service
- loanDepot: Best for Refinancing
- New American Funding: Best for Poor Credit
- PennyMac: Best Lender for a Low Down Payment
- Quicken Loans: Best Overall
- SoFi: Best Online
Busey Bank: Best Traditional Bank Mortgage for Customer Service
If you’re looking for a bank with stellar customer service, St. Louis, Missouri-based Busey Bank might just be the mortgage lender for you.
Busey Bank has a proud history spanning 150 years, having been established in 1868. So while they may not be one of the biggest lenders on this list, they still have a good range of fixed and adjustable loans and loans through the FHA and VA mortgage loan programs.
Busey Bank also has offices in Florida, Illinois, and Indiana.
Chase: Best Traditional Bank
As far as traditional banks go, if you’re looking for an in-person borrowing experience with excellent customer service, you may want to consider Chase.
Chase is one of the biggest banks in the world, claiming almost half of all U.S. households as its customers in some way. And it just so happens that they are also one of the country’s top mortgage lenders. They also have industry-leading applications to help you manage your accounts with them, including your mortgage.
Citi Mortgage: Best for Low Income
Thanks to its recent investments in a new online system, Citi Mortgage (a sister company to Citibank) has now a better, more efficient way of serving clients looking for a home loan.
Particularly for those looking to getting an FHA or a VA loan, Citi Mortgage might just be the best option for you should you qualify for one.
Guaranteed Rate: Best Interest-Only Option
Interest-only loans are indeed an option for those with mortgages, but while you only shell out a small amount each month, you don’t actually make any progress chipping away at your principal or building equity.
But it is an option, still. And Guaranteed Rate offers interest-only mortgages in all 50 states, claiming a 95 percent customer satisfaction rating, as well as solidifying its position as one of the top mortgage lenders in the country today.
Lenda: Best for Customer Service
An online-only mortgage lender, Lenda’s digital system makes it clear what you need to send in and offers updates for what is missing, so you don’t have your approval or funding held up by one form or document.
Lenda offers quick and easy pre-qualifications and refinancing estimates through its website, but it doesn’t offer customer service exclusively through the Web. They actually offer a concierge service to further help you down the lending process, greatly adding to an already convenient paperless system.
loanDepot: Best Mortgage Lender for Refinancing
Once your life (and financial) situation has improved somewhat, refinancing your existing home loan can make things even easier for you, especially if you can get a lower mortgage rate in your favor.
The folks at loanDepot have made quite a name for themselves when it comes to those looking to refinance their home loans, having funded more than $70 billion in mortgages.
loanDepot has also waived refinance fees and reimbursed appraisal fees for all future refinances after your first refinance with them.
New American Funding: Best Mortgage Lender for Those with Poor Credit
Most lenders approve or deny applications solely on system-generated reports, so those who fall within the textbook definition of having bad credit find it difficult to get a loan.
The folks at New American Funding do take the effort to manually review applications that go through them, looking for those that might have a less-than-ideal credit score, but do quite well in terms of savings or income. A minimum 580 credit score is still required though, regardless of finances.
So for those that do have low credit scores, New American Funding is a great place to get started, even allow you to build up that score as long as you keep settling your monthly mortgage payments on time.
Penny Mac: Best Lender for a Low Down Payment
As a direct lender focusing mainly online, Penny Mac offers a full range of loans, including conventional, jumbo, FHA, VA, and USDA loans.
But if you’re looking specifically for a mortgage with a low down payment, consider the FHA loan from PennyMac. This is great news especially for first-time buyers without much cash on hand looking to acquire a home.
Quicken Loans: Best Overall Mortgage Lender
With a nationwide presence and attractive online lending applications, Quicken Loans continues to be one of the biggest (if not the biggest) mortgage lenders in the country today.
Its mortgage rates are highly competitive and its online processing is a lot more hassle-free compared to most other traditional mortgage lenders. The application process is quick and simple, which is why so many people use it every year.
SoFi: Best Online Mortgage Lender
Social Finance started out as a student loan refinancing company but has surprisingly done very well with other loans including mortgages.
Focusing on owner-occupied primary and second homes, The Balance has named SoFi as the best online mortgage lender offering 30-year and 15-year fixed loans as 7/1 ARM and 5/1 interest-only ARM loans.
The borrowing process at SoFi starts with a pre-qualification that does not impact your credit score and takes about two minutes to complete. From there, you can pick your loan and complete all of your paperwork.
Is 3.99 a Good Mortgage Rate?
The average rate for a 30-year fixed rate mortgage is currently 3.99 percent, with actual offered rates ranging from 3.13 percent to 7.84 percent. (Source ValuePenguin)
3.99 is already pretty good, as far as mortgage rates go. Historically (at least over the past 48 years), interest rates on the 30-year fixed-rate mortgage have ranged from as high as 18.63 percent in 1981 to as low as 3.3 percent in 2012.
Today, mortgage rates remain at historical lows, with over 60% of mortgage holders paying rates between 3.00% and 4.90% as of 2015.
Here’s a question you should ask yourself: can you get a better rate? You might have already been shopping around for the best possible mortgage rates you can get for yourself.
Remember, a lot of factors come into play when we’re talking about mortgage rates, and fortunately, you do have some control over some of these. Depending on your financial standing, you can even go ahead and negotiate your mortgage rates before closing with the bank or lender of your choice.
Can I Negotiate My Mortgage Rate With the Bank or Lender?
The short answer is: yes, you can negotiate your mortgage rate with your lender. And if you’re in a good position to do so, you should.
Your success in negotiating your mortgage rates down with your lender will depend largely on how you stand as a borrower. The more financially well-qualified you are, the better your negotiating power.
What Will Make Me a Well-Qualified Borrower?
Lenders look for strong borrowers— those that have a fairly good standing in terms of financials that make them the ideal candidate for giving loans to.
Well-qualified buyers can pick and choose the best mortgage rates, fees and terms. Marginal borrowers just don’t have that sort of clout, and will have to take what they can get, and be thankful they can get approved at all. That’s just how it is– a harsh reality of the lending world.
To be considered a well-qualified borrower, here are the qualification criteria lenders look at:
- You must have a solid credit score
- You have minimal debt
- You can afford to make a down payment in the 20% range
- Your income is more than sufficient for the amount you want to borrow
If you meet these criteria, you can negotiate almost everything during the mortgage process. Well-qualified buyers are ideal candidates for home loans because of their lower risk profile than most borrowers. Simply put, if you’re a well-qualified buyer, you’re in a better position to negotiate the mortgage rate and fees.
On the other hand, if your financial standing isn’t quite so stellar, you won’t have much in terms of negotiating power. In a scenario where three out of four lenders can turn you down, you won’t have very much negotiating power with the fourth.
In the mortgage world, this is known as risk-based pricing. Lenders use credit scores and other factors to determine the level of risk brought on by individual borrowers.
Using Discount Points to Negotiate a Lower Mortgage Rate
There’s another way to reduce your interest rate. This method involves the use of mortgage points, or “discount” points. It’s a good strategy that even marginally qualified borrowers can use this to get more favorable mortgage rates.
A discount point is one of two types of mortgage points (origination points are the other). A point is equal to one percent of the amount being borrowed.
For example: One point on a $300,000 home loan equals $3,000. Two points on the same size loan would equal $6,000.
Discount points are a form of prepaid interest. You can pay them at closing to secure a lower mortgage rate on your loan. It’s like paying some of the interest up front, to avoid paying it over the long term. (Source: Home Buying Institute)
By paying points upfront at closing and getting more favorable mortgage rates, you would save more in monthly payments (over the years) than the amount paid up front in discount points.
From Bank of America’s Better Money Habits.
A Final Word About Mortgage Rates
Purchasing a home is a serious matter indeed; it involves a careful assessment of what you can afford, how your finances are doing, and what sort of loan options are available to you.
Understandably, you’d want to purchase your home by putting in as much equity as you can by means of a down payment. This is usually about twenty percent, but putting in more towards equity works greatly to your advantage. The rest of the home’s sale price will then be covered by a secured home loan– your mortgage.
Mortgages aren’t a one-size-fits-all solution. And to get the one that’s best for you, it’s important to understand what makes them all different. While there are a lot of different kinds of mortgages within those categories, figuring out which of these two types best suits your needs is a good place to start.
At closing, being able to negotiate the best possible mortgage rates should be your priority. Depending on what you might be more comfortable with, you may choose to go with a fixed-rate mortgage or an adjustable-rate mortgage (or some variation thereof); each type with its own pros and cons.
So when it comes to buying a home whether now or in the future it’s important to know the ins and outs of getting the right mortgage. What’s more, you need to have your financial house in order before you get started.
Work out a budget, look up current interest rates, run some numbers using an online mortgage calculator, and be sure to be honest with yourself about how much home you can really afford.
Because you’re not only setting out the welcome mat for a happy home, you’re making a financial commitment for many years to come.
Are you getting a good deal on your mortgage rate?
Here is what we know,
According to mortgage professionals, getting home loans starting at 3% is a great deal.
A dramatic decline in mortgage rates has been noted in the past month to November 2012 levels.
Mortgage rates have gone down to its lowest level in nearly four years at 3.31 percent for standard 30-year fixed rates.
While the decline is good news to people who want to refinance, it has resulted to questions on the state of the global economy.
What We Know Of Current Mortgage Rates
The decline in interest rates is based on a different macroeconomic perspective as compared to what happened after the economic downturn years ago.
The Fed worked on enhancing its balance sheet in 2012 through the purchase of mortgage-backed securities and Treasuries, which essentially led to the decline in interest rates.
Here’s the deal:
These purchases were ended by the Fed, which worked on relaxing the policy of keeping interest rates at near zero levels. This was implemented to deal with the financial crisis.
Mortgage rates are not expected to go below its current level since the Fed has stopped purchasing assets to lower interest rates.
Since prices increased significantly due to the purchases of the Fed in 2012, it resulted to lower yields.
With the absence of any stimulation on the demand and supply balance, the significantly low interest rates are expected to be a temporary situation.
The ten-year Treasury yield, which is considered as sign of mortgage rate changes, is suitable proof of the decline in interest rates.
The past month showed a reduction in the ten-year yield to its lowest level since 2012 but has increased due to movements in the market.
Mortgage rates would have been lower if the yield went down to its lowest levels in 2012.
What’s the bottom line?
A statement released by Freddie Mac on Thursday showed that the average thirty-year fixed mortgage rate was at 3.57 percent, which is lower than the 3.61 percent last week. It is also the lowest level since May of 2013.
a decline on the fifteen-year rate was also noted from 2.86 percent to 2.81 percent.
Ten-year treasury yields also went down following the release of the job information by the Labor Department. The information showed the addition of the lowest number of jobs for the past seven months in the month of April.
Employment figures and other economic areas are being monitored by policy makers at the Federal Reserve to give them an idea when interest rates should be increased.
No action was taken during the last meeting as they indicated any movement will be made gradually, which means there would be no spike in mortgage costs in the near future.
A 4.5-percent increase in mortgage rates during the summer will only result to an additional $700 on annual mortgage payments for homes costing around $200,000.
Why did interest rates go down again?
Since the Federal Reserve did not make any changes in the demand and supply, questions were raised on the reason behind the recent decline on interest rates. The likely reason for the decline may be a major international event that spooked the market.
It is related to both market psychology and hard economics.
Whenever such an international event happens, movement in the market is expected as central banks would react or extend policies for easy money to deal with any economic slowdowns. This would result to a decline in interest rates in the same level as 2012.
The question is what type of event would result to this situation? It may be a slump in the GDP or labor market of the United States.
This may result from adverse news coming from China similar to what happened in August 2015 and January 2016. During these instances, a sharp decline in mortgage rates was noted, which resulted to concerns in the entire market.
Federal funds rates are the interest rates primarily manipulated by the Federal Reserve.
This rate is paid by banks whenever they take out overnight loans from each other. In comparison, mortgages are unlike overnight loans.
The prices have the tendency to be connected to long-term borrowing rates, which are normally the ten-year Treasury bonds.
It is not the thirty-year bond since only a small number of homeowners pay for the entire loan before they move or resort to refinancing.
Things investors should anticipate
In my opinion, it may be necessary for investors to recognize the situation when the rates went down to this level to be able to determine the effect of the economy of today on any changes in the future.
The years following the international financial crisis saw a refinancing boom encouraged by low interest rates, which benefited banks across the country.
Prominent mortgage companies, such as Bank of America and Wells Fargo, were able to compensate weaknesses in legacy mortgage assets, commercial real estate and chaotic market trading with the fees they collected from this surge as well as its volume.
It facilitated an increase in the capital they required to pay off fines and settlements amounting to billions of dollars due to misconduct that resulted to the crisis in the first place.
Activity in the real estate and lending industries is expected to be boosted by the current low interest rates similar to what happened in 2012.
Current activity is dependent on the overall stability of the real estate market.
The market is spurred by home purchases instead of refinancing activities, which was the main driver in 2012.
It is logical to see that the increase in home prices correspond to a lower level of refinancing activities.
Wells Fargo, the Bank of America and other lending companies may consider the current low rates more influential on consumers as well as home loan companies aiming to get funds as well as refinance their loans simultaneously.
Wells Fargo is the only major financial institution to see its revenues increase during the first quarter due to its mortgage business.
On the other hand,
profits of the consumer banking unit of the bank of America increased by 22.2 percent at $324 million during the first quarter when compared to the first quarter of last year.
These positive developments are simply the beginning of things to come if interest rates remain low or go down further.
This opportunity is supported by current economic data. The month of April saw an increase of over 13 percent in mortgage application in contrast to the same period last year.
Housing also increased by 31 percent during the same period while an increase of 18.5 percent and 17.5 percent was noted in homes under construction and finished homes, respectively.
Even as no reaction was noted in the stock market on the potential, the Toll Brothers is currently preparing for some movements in the market.
Stock prices declined by over 21 percent for the past twelve months even as the S&P 500 declined by 1.2 percent.
However, the management of the Toll Brothers in anticipating an increase in revenues by around 25 percent each year as profits and efficiency will experience strong growth.
In my opinion,
any volatility in the market due to any unexpected events that may result to economic problems causing the market to be spooked will be a sensible opportunity to buy the stocks of builders or lenders benefiting from lower interest rates resulting to new purchases in the US real estate market.
The critical factor is to avoid panic and remain focused on valuable companies as well as wait for the opportunity to acquire stocks at a lower price in the market.
Because of Mortgage Rates Home prices are expected to fall
Another important factor to consider is the fact that home prices normally fall when mortgage rates increase.
Home prices are expected to decline with an increase in interest rates. But, this will not happen immediately.
This is good news for buyers. For the moment, a good number of cities are considered as “seller’s markets.”
The number of homes for sale is higher than the number of people aiming to purchase a home.
Suitable time for refinancing
One important milestone to consider is the point when mortgage rates reach 5 percent, which can be a critical moment.
As of now, experts think the only individuals acting soon are those aiming for refinancing, but this opportunity is not expected to pass right away.
- “Fixed-Rate vs. Adjustable-Rate Mortgages: What’s the Difference?” https://www.investopedia.com/mortgage/mortgage-rates/fixed-versus-adjustable-rate/
- “What are Mortgage Points?” https://bettermoneyhabits.bankofamerica.com/en/home-ownership/buying-mortgage-points-lower-rate
- “Most Interest Rate Forecasts Dropping—But Don’t Be So Sure” https://www.forbes.com/sites/billconerly/2019/07/13/most-interest-rate-forecasts-droppingbut-dont-be-so-sure/#4b55d91b267a
- “Why Renters Should Pay Attention to How the Federal Reserve Affects Mortgage Rates” https://www.discover.com/online-banking/banking-topics/how-the-federal-reserve-affects-mortgage-rates/
- “What Happens to Interest Rates During a Recession?” https://www.investopedia.com/ask/answers/102015/do-interest-rates-increase-during-recession.asp
- “What Are Closing Costs and How Much Are They?” https://www.zillow.com/mortgage-learning/closing-costs/
- “What Are Mortgage Points and When Should I Buy One?” http://www.homebuyinginstitute.com/mortgageprocess_article12.php