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Feb. 26, 2021, 11:48 a.m. EST

The best mortgage rates of 2021

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By Home Media

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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.

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