Mortgage. A Beginner s. Rates. Guide

Transcription

1 Mortgage Rates A Beginner s Guide

2 US Mortgage Corporation (NMLS ID#3901). Corporate Office is located at 201 Old Country Road, Suite 140, Melville, NY 11747; or (800) (LOANS15). Licensed Mortgage Banker-NYS Department of Financial Services- AK, AL, AR, CA, CO, CT, DC, DE, FL, GA, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MN, MS, MT, NC, ND, NE, NH, NJ, NM, OH, OK, OR, PA, RI, SC, SD, TN, TX, VA, VT, WA, WI, WV, WY State Banking Departments/Regulators. Rates, fees and program guidelines are subject to change without notice. Some loans arranged through third parties. First mortgages only. Not all products and/or programs are available in all states. Certain restrictions may apply.

3 Table Of Contents Chapter 1: What Is A Mortgage?... Page 01 Chapter 2: Types Of Mortgages And Mortgage Rates... Page 03 Chapter 3: Finding The Best Mortgage Rates... Page 07 Chapter 4: Mortgage Rate Lock-In... Page 09 Things To Consider... Page 11 Chapter 5: Effects Of Changing Mortgage Rates.... Page 13

4 Chapter : 1 What Is A Mortgage? 1

5 Although almost all of us have heard of the word, mortgage, most of us don t really know what it means. Unless you are planning on becoming a home-owner, you will not know the terms and features of a mortgage. In the simplest terms, a mortgage is a loan that you take out to buy a property. Unlike other types of loans, a mortgage takes a long time to pay back and they are secured against property. Most mortgages have time-periods of around 25 years, so the choice of taking out a mortgage should not be taken lightly. Failure to maintain repayments can result in the repossession of your home. This is a problem that many Americans faced during the subprime crisis. The interest rate at which the mortgage loan is taken is known as the mortgage rate. Mortgage rates are not the same for all borrowers. The rates depend on type of loan, time-period of the loan, the borrower s credit history and the current economic situation. Mortgages are very long-term loans and they are not as simple as other types of loans. Also, by the end of the mortgage, borrowers end up paying a large amount as interest. To get the lowest mortgage rate possible and to get the home of your dreams, you need to research and compare and make sure you know enough about mortgages to take the plunge. However, thousands of people apply for mortgages every year and beginners looking to take out a mortgage can obtain all of the necessary information from the following sections. 2

6 Chapter : 2 Types of Mortgages & Mortgage Rates 3

7 Taking out a mortgage is a life-changing decision as it can affect your financial situation for the next couple of decades. Mortgage rates are obviously the most important part of the mortgage as it decides the mortgage repayment installments. You need to take out a mortgage with an interest rate and monthly installments you can afford to pay. Different banks, lenders and financial institutions offer many different types of mortgages with different rates. Moreover, these rates also depend on the credit history of the borrower. However, all the types and rates of mortgages fall into the following categories. 4

8 Chapter 2: Types of Mortgages & Mortgage Rates 5

9 Fixed Rate This is one of the safest types of mortgages available. In this type of mortgage, the interest or mortgage rate will remain fixed for the entire term. This means that your monthly payments will remain the same. This gives a sense of security and certainty to the borrower. Two common types of fixed-rate mortgages are available 30-year fixed mortgage and 15-year fixed mortgage. There are other terms of mortgages available too. The 30-year fixed mortgage is the most common type of mortgage that people take out. As the term of this mortgage is very long, the monthly payments are very affordable. Also, the interest rate and monthly payments do not change over the entire period. 15-year fixed rate mortgages are similar except that the borrower has half the time to repay the loan. This means that the monthly payments are higher. However, the shorter mortgage period allows people to build equity much faster. Adjustable Rate Adjustable Rate Mortgages (ARMs) are riskier, as in this type of mortgage, the interest rate varies with time. It can give homeowners a lower mortgage rate, but these rates vary with the market and borrowers may end up paying more than they would with fixed rate mortgages in the long run. These variable rate mortgages are also more complex and homeowners must comprehend the contract properly before signing it to avoid nasty surprises. The rates of the ARMs may change on a yearly basis. Combination Mortgages As the name suggests, this type of mortgage loans combine fixed-rate and ARM features. Homeowners are offered a fixed mortgage rate for a period of the term of the loan after which the interest rates vary yearly, like that of ARMs. The interest rate of the mortgage can remain the same for three, five, or seven years. After this period, it will be converted to an ARM. Split Rate In this type of mortgage, homeowners are offered a fixed mortgage interest rate on part of the loan balance and a variable rate on the rest. The balance can be split in many ways such as 75/25 and 60/40. Introductory Rates Such mortgage rates are offered by banks to lure customers and are often known as honeymoon rates. In these types of mortgage loans, interest rates can be as low as 2% less than the market average for a period of 6 months to a year. Once this time period expires, mortgage rates are converted back to original rates matching market averages. 6

10 Chapter : 3 Finding the Best Mortgage Rates 7

11 As mentioned earlier, shopping around for a mortgage loan is not an easy task and is time-consuming. Finding affordable mortgage rates is probably the most important task while looking to take out a mortgage. The interest rates will ultimately decide the amount of money you need to pay as monthly installments. High interest rates could mean that you will end up paying a lot more than the value of the property and principal amount in interest itself. So how do you reduce the interest rates that lenders are offering you? Take Out An FHA Mortgage Firstly, you need to check if you are eligible for a Federal Housing Administration (FHA) home loan or mortgage. These home loans are mortgages that are fully insured through the FHA. Consequently, an FHA mortgage has a lot of benefits over mortgages offered by other financial institutions. The organization offers some of the best terms, such as lower interest rates, lower down payments, and lower closing rates. It is also easier to qualify for an FHA mortgage and there is less chance of foreclosure. Do Your Research There are tons of websites and tools that allow you to compare and analyze the mortgage rates offered by different lending institutions. As mortgage rates change almost daily, it is best to monitor these rates over a period and then decide on the type and rate of mortgage to settle on. Of course, the mortgage rate available to you will depend on your income, assets, FICO credit score and debt to income ratio. Choose Short-Term Loans 15 year mortgage loans are offered at a lower interest rate than 30- year or 25-year ones. However, the monthly payment amount is much higher for short term loans. If you can afford the monthly payments, then you should go for a short term loan as you will be paying much less in the long run. Improve Your Credit Score It is common knowledge that a good credit score will ensure that you get the best interest rates on all kinds of loans. A good credit score can save you thousands of dollars over the term of your mortgage. You can get the best mortgage rates if your FICO score is 760 or better. A good score, along with a stable income, guarantees that you get the best rates. Raise Your Down Payment Lenders consider the amount of down payment on your home while deciding your creditworthiness and interest rate. The lowest rates are offered to those who have at least a 20& down payment, or in other words, a 20% equity cushion. A lower down payment means that you will also have to pay for Private Mortgage Insurance or PMI. 8

12 Chapter : 4 Mortgage Rate Lock-In 9

13 Lenders publish mortgage rates on a daily basis; however, these rates may not be applicable to you, as interest rates depend on many personal factors. After a lender has accepted and analyzed your mortgage application, you will be offered an initial approval and the choice to lock-in the mortgage rate offered to you. Once you lock the mortgage rate, the lender has to finalize your home loan based on the rate you were offered on the day you locked-in the rate, even though mortgage rates change daily. Mortgage rates cannot be locked till the lender has verified your credit score and checked if you have a steady income to make monthly payments. You also need to decide on the property you wish to buy before you can lock-in your mortgage rate, as some properties, like condominiums, can only be financed at higher mortgage rates. Rate locks are not permanent and they are valid for 30 days on average. As it takes more than 45 days to successfully process a loan, it is best to lock mortgage rates after you find out when the closing date of the loan is. Most people lock in their mortgage rates when they are sure that the lock will not expire before the close of the loan. 10

14 Things To Consider Some lenders also offer extended locks on rates lasting up to 120 days. To get these extended locks you have to pay points, which are payments towards the interest amount. Rate quotes and rate locks are very different terms. A rate quote is a general estimate of the rates you could get whereas a rate lock is legally binding and decides the final rate offered to you. Most importantly, you must get the rate lock in a written document. A verbal agreement is useless and a rate lock should be a legally binding document. This document must accompany the letter of commitment or should be explained in the commitment letter itself. The lock-in document must include the names of the lender and borrowers, the loan amount, points, interest rates and the lock-in fees. The date the lock was initiated and the expiry date of the lock must also be mentioned in the lock-in document. You must read this document carefully while deciding on a mortgage rate lock in. Check if your rate lock comes with a rate cop. Rate cops with your rate lock means that if the interest rate rises, the lender is allowed to raise your mortgage rates slightly while remaining within the rate cap. Although this is a common practice, it is best to be aware of this when you lock-in your rates. 11

15 Chapter 4: Mortgage Rate Lock-In 12

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17 Chapter : 5 Effects of Changing Mortgage Rates 14

18 15 Why Aren t Mortgage Rates Stable?

19 Most people ask why aren t mortgage rates stable? Mortgage rates are subject to economic forces and even a slight increase or decrease can make a lot of difference in the repayments that you make. When there is an economic decline and sales of homes are decreasing, the rates also decrease. Similarly, when economic activity rises, the rates rise too. Loan percentage points or mortgage rates change almost daily and sometimes more than once a day. Homeowners who have taken out fixed rate mortgages are somewhat insulated from the effects of constant mortgage rate changes. People who have taken ARMs will not feel the effects of daily mortgage rate changes as lenders are allowed to change mortgage rates only a fixed number of times a year. Lenders cannot change mortgage rates more than four or five times a year. Drastic changes in mortgage rates can have profound effects on both homeowners and sellers and buyers of real estate. Homeowners are often not prepared for ARM rate changes and their homes are repossessed when they are unable to afford monthly payments. Even if the situation is not so dire, many homeowners have to adjust personal finances to meet rising mortgage rates. Rising mortgage rates may eat into the purchasing power and life savings of homeowners. Buying habits of potential real estate buyers and average consumers are also affected by mortgage rate changes. Most importantly, higher mortgage rates can make it hard for many homeowners to make payments. Late payments can result in hefty fines and can also affect the credit scores of homeowners. 16

20 Corporate Office 201 Old Country Road, Suite 140 Melville, NY On US: 800-Loans