How to Shop for a Mortgage
As interest rates begin to rise, now is the time to take action. Find out how to get the best deal.
After six years of record low interest rates for home mortgage loans, what can home buyers—or owners who want to refinance at a lower rate—expect this spring and for the remainder of 2016?
First, some bad news: You’ve missed the absolute rock bottom of rates. The economy has finally started to pick up steam, and rates are inching up.
There’s plenty of good news, however, so don’t despair. Rates still are way below the nearly 5.8 percent average for a 30-year fixed-rate loan we saw back in June 2009. And let’s not even talk about the 18 percent average in 1983!
Credit is getting looser, too, as the crackdown on shaky loans that occurred after the recession is easing up.
As a result, your down payment could be significantly lower than the 20 percent or more lenders have been requiring. In fact, Freddie Mac has brought back “3 percent down” programs for low- to moderate-income creditworthy borrowers (check here for information). And plenty of mortgages are available to other borrowers with just 5 percent down, says Guy Cecala, publisher of Inside Mortgage Finance.
Jumbo mortgages (loans of more than $417,000, or $625,500 in high-cost areas) have also made a comeback, with rates that are comparable to regular loans. However, you may need a higher credit score and a bigger down payment to get one.
Assess your mortgage fitness
While loans are more available than they have been, that doesn’t mean just anyone can get one. Ask yourself these questions to assess your chances:
- Am I a good credit risk? One of the first things lenders do is pull your credit score. The most common is the FICO score, which is based on data from one of the three major credit bureaus (Equifax, Experian and TransUnion). Lenders typically use the lower of two scores, the middle of three or the average of all scores. If you have a co-borrower, they usually compare your scores and use the lower of the two or average them. Mortgages backed by the Federal Housing Administration require an average score of 690 out of 850, according to the Ellie Mae Origination Insight Report, which analyzes mortgage loan applications. But many lenders will allow a larger down payment to offset a lower credit score.
- Do I make enough money? Lenders look at the ratio of your monthly housing expenses to your income. Monthly housing expenses include loan principal and interest, real estate taxes, hazard insurance, plus mortgage insurance if you have to pay it, and any condo or association fees. In general, housing expenses shouldn’t exceed 25 percent to 28 percent of your gross monthly income.
- Can I handle the extra debt? If you have a lot of debt, you may not qualify. To measure your “capacity,” or your ability to take on more debt, a lender will look at your income history and that of your spouse, your debt-to-income ratio by totaling all your credit card and other debt payments as a percentage of your income, and the amount of savings you have. If you have a lot of debt—more than 45 percent of total debt to income—you’ll have to have a stellar credit rating and put a lot of money down to get a decent loan rate.
- Do I have to pay PMI? Those initials mean private mortgage insurance, and homeowners hate them! If your down payment is less than 20 percent, you may have to pay PMI, which protects the lender if you quit paying your loan. The more you put down and the higher your credit score, the less PMI you’ll pay. Note that when the principal balance of your loan falls below 80 percent of your home’s original value, you can ask your lender to cancel PMI. Just be aware you may have to pay for a new appraisal.
- Do I qualify for any special loan programs? For example, you may not need a down payment or mortgage insurance if you (or a co-borrower) qualify for a Veterans Affairs home loan. You will, however, have to pay an up-front fee of up to 3.3 percent of the loan amount. In addition, Rural Development Guaranteed Loans from the U.S. Department of Agriculture allow qualified, low-income borrowers in selected areas to buy with nothing down, although they also will pay an up-front fee and an annual fee.
Judge your refi readiness
Be sure that refinancing to a lower interest rate—and maybe a lower monthly payment—will actually save you money. Ask yourself:
- How low can I go? Get loan estimates from several lenders to check rates and see how much you’d pay in closing costs. Forget the rule of thumb that to refinance your mortgage you need to reduce your rate by two percentage points. The question is whether you will stay in your home long enough to recoup the closing costs with savings on your monthly payments.
- How long will it take to break even? For a rough idea, simply subtract the new monthly payment from your current one and divide that into the total closing costs. For a more nuanced, accurate picture, however, use the refi calculator at MortageProfessor.com. This tool accounts for how long it will take you to pay off the loans and other factors that can shorten or extend your break-even period.
Taking the plunge
Before you take out a new mortgage or refinance an existing loan, there’s one more important question to ask:
- Have I shopped around enough? The Consumer Financial Protection Bureau, the federal government’s new agency to protect consumers, says that 77 percent of borrowers apply to only one lender. However, the Bureau recommends asking for loan estimates from at least three and comparing the deals. Check out CFPB’s new interactive website for more information.
You’ll also want to consider if you should pay more “points” on your mortgage to get the lowest interest rate. You have to decide which is more important to you: paying cash up front for a lower rate or keeping more cash in your pocket for a slightly higher monthly payment.
Ultimately, getting a new mortgage or refinancing one can seem complicated. But if you do a little homework, it should be relatively easy. Spring is a top time for real estate sales, and even though interest rates are rising a bit, they are still much cheaper than in the past. It’s definitely not too late to take action.
READY TO BUY A HOME?
As an NEA member, you have acces to competitive interest rates through the NEA Home Financing Program.
Shopping for a mortgage?
NEA members have access to competitive interest rates plus additional benefits through the NEA Home Financing Program.
Also in This Issue
More popular articles from this edition of NEAchieve!