By Home Media
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If you’re looking to purchase a home, there is a high probability that you will have to take out a mortgage. A mortgage is often paid (with interest) over the course of multiple decades, so it is worth investigating and making sure you’re getting the best rates.
In this article, we’ll discuss what a great mortgage rate looks like and explain the process for approval and qualification for a mortgage. At the end of the article, we’ll recommend a few companies in case you’re ready to start your research right away.
What is a good mortgage rate?
Interest rates and APRs are comparatively low right now, so we pulled some average interest rates and APRs from Zillow, which are current as of January 13, 2021. Listed below are some of the most common conventional mortgages and their current rates:
Best mortgage lenders
We never recommend one-stop shopping. After all, there are hundreds of reputable mortgage lenders, and taking your time and seeking several quotes will help you get the best rate. We’ve listed below some national providers with competitive rates. We’ll also include some more specific information about each to further assist you in your search. These numbers reflect requirements for a conventional loan. You may qualify for a government-backed loan with a lower credit score than is listed here.
What is a mortgage?
A mortgage is a loan on a home, consisting of a principal and interest rate. Interest rates can vary and change, due to the fact that the market is always changing. Changes in interest rates can be brought about by changes in the general economy, and there are a variety of other factors that affect the current landscape.
Mortgages can be paid in many different ways. The two most popular mortgages are fixed-rate mortgages and adjustable-rate mortgages (ARMs). A fixed rate mortgage can be taken out for any number of years — usually between 10 and 30 — and locks in your interest rate for the duration of your loan. An adjustable rate mortgage is a mortgage with a short window of time where your interest rate will stay the same. After this initial adjustment period, your loan is then subject to change over time.
What do I need for a mortgage?
Before you actually agree to the terms of a mortgage, you’ll likely need to get pre-approval. A pre-approval letter from a lender indicates that you are able to pay back your loan in a timely manner. The pre-approval process includes several items, such as:
Debt to income ratio
Pay stubs and W2 forms
Intended mortgage loan amount
Your lender will take into account all of your financial statements and information, then produce a pre-approval letter indicating how much mortgage you can afford. Usually, the letters are good for 90 days, so it’s important to seek pre-approval when you are ready to purchase a home.
Which type of mortgage is right for me?
Mortgages are usually paid back to the lender over the course of several years. For example, a popular mortgage term is 30 years, so it is often a lengthy commitment. Listed below are some of the most common types of mortgage:
Fixed Rate: Your interest rate will remain the same over the course of your loan. Common lengths of time for this type of loan are 10 years, 15 years and 30 years, with 30 years being the most common. If you choose a lower loan duration, your monthly payment will be higher, but you’ll pay off your loan sooner, meaning you’ll pay less in interest. Most mortgages are fixed rate mortgages, often garnering over 90% of the market share.
Adjustable Rate Mortgage (ARM): An adjustable rate mortgage does not have an interest rate that is set in stone like a fixed rate mortgage. This means that your interest rate will fluctuate as dictated by the market. This loan is more risky for the home buyer than the lender, because you could easily end up paying a higher interest rate over the course of your loan.
Hybrid ARM: A hybrid ARM has a short adjustment period where the interest rate does not change. After the predetermined window is closed, your interest rate will now fluctuate with the market. This can be helpful for homeowners who don’t plan to stay in their home for very long. The terms are expressed as a fraction, so a hybrid ARM with a three year adjustment period would be a 3/1 ARM.
Refinancing: Refinancing is a tool used when homeowners want to take advantage of lower interest rates to pay a lower cost for their mortgage. If you have more income than when you first bought your home, you can refinance to build equity or shorten your loan term. Refinancing at an opportune time can lower your monthly payments without lengthening your loan, and it can also shorten your loan time while keeping your monthly payments the same.
Annual Percentage Rate (APR): APR is a more precise interest metric because it factors in extra fees, such as lenders fees, mortgage points and other associated costs. For this reason, the APR is typically a more important number than interest rate to homebuyers.
Frequently asked questions
What are the advantages to government-backed loans?
FHA loans, VA loans and USDA grants are all insured by the federal government. These loans are intended to assist home buyers who may not qualify for a conventional mortgage. Buyers with a credit score of at least 580 can put as little as 3.5% down on a home by using an FHA loan.
What is a credit score?
A credit score is a metric used to indicate your credit worthiness. A high credit score indicates to lenders that you will be able to make your mortgage payments on time. Many conventional mortgages require a credit score of at least 620 in order to qualify. Also worthy of note, a higher credit score will likely grant you a lower APR.
Is a fixed rate or adjustable rate mortgage better?
Fixed rate mortgages are much more popular due to the static interest rate and predictable payments over time. However, there are times when an adjustable rate may be more advantageous. Adjustable rates place more risk on the borrower, but if the market trends downward during the course of your loan, or if you’re not planning to stay in your new home for long, an adjustable rate mortgage may be worth investigating.