Why the Lowest Mortgage Rate Could Cost You Thousands
As a loan officer, many borrowers tell me they want the lowest possible interest rate. I listen carefully, and then I begin to ask questions. Experience has shown me that the lowest possible interest rate could actually end up costing borrowers thousands of dollars!
INTERNET RATES
Many borrowers will scour the internet for the lowest possible mortgage rates. Low rates will indeed pop up, but most often they won’t apply to most borrowers. The rates may assume a very high credit score, a large down payment, or even the cost of paying discount points to get the advertised rates. Many of the low rates that are advertised are also coming from mortgage brokers. Typically, mortgage brokers are third parties that have relationships with multiple investors. This means they can “shop around” for the lowest rates when it is time to lock in. Because the broker is a third party, they don’t control the processing and underwriting aspects of the loan. If something unusual is found during the loan process, many times the issue is not communicated immediately and causes loans to close late. Once a sale is postponed due to loan issues, the buyer can face the possibility of losing their earnest money deposit and can be sued for damages by the seller. This is why lower rates aren’t always the best way to go for a borrower.
ADJUSTABLE RATE MORTGAGE
Generally, an adjustable rate mortgage (ARM) will offer lower rates than a 30 year fixed rate mortgage with the shortest term on the ARM offering the lowest rate. For example, a 5/1 ARM may have a rate of 3.375% while a 30 year fixed loan may be at 3.75%. The monthly payment for the ARM will be less than the 30 year fixed rate for the first 5 years. After five years, the rate will adjust based on the then current market. Since rates today are close to the lowest ever, it is likely that in five years the interest rate will soar – causing the monthly payment to skyrocket!
FHA LOANS
FHA loans also offer lower rates than a conventional loan. Currently, a conforming FHA loan may offer a rate of 3.375% with the corresponding conventional loan offering the same 3.75% as in the previous example. The difference is the FHA loan adds an additional 1.75% to the loan amount in what is referred to as an “Upfront Mortgage Insurance” premium. The FHA loan also has a monthly mortgage insurance premium that remains on the loan for as long as you own it. The rate for this monthly mortgage insurance payment is most often much higher than a corresponding monthly mortgage payment on a conventional loan. The result: a higher monthly payment on a loan with a lower interest rate.
MORTGAGE INSURANCE
Another thing to factor in is Mortgage insurance. Mortgage insurance comes into play when a purchaser is putting less than 20% down on their desired home. There are a couple of ways in which the mortgage insurance can be paid. One way is to make monthly mortgage insurance payments. If making the minimum payment required each month by the lender, these mortgage insurance payments continue until the loan-to-value reaches 78%. In the case of a beginning loan-to-value of 95%, these payments may take as much as 9 years before reaching the 78% threshold where the payments stop. The second method of dealing with mortgage insurance is to have the lender pay for the mortgage insurance premium. This results in a higher interest rate – but no mortgage insurance payment. The overall monthly payment will be lower on this option even though the rate may be up to .5% higher. Paying even $25 more each month for 9 years will cost the borrower $2,700!
WHAT YOU NEED TO KNOW
It is always important to let a lender help you determine the best possible loan solution. Some of the most important factors for the loan officer to know are:
- Monthly Income
- Monthly debt
- Credit score
- Credit history
- Cash available for down payments and closing costs
- Length of time you expect to own the loan
With this information, your loan officer should be able to provide multiple loan options. In addition, they should provide explanations as to why one would be preferred over another. And more often than not the loan with the higher interest rate becomes the best long term solution!
Thinking about buying or refinancing a home? Make sure you speak to a lender first! You can reach Keith Harris, Senior Loan Officer at Intercoastal Mortgage Company online or by calling 703.259.0788.
Keith Harris at Intercoastal Mortgage Company
NMLS ID # 838973
Company NMLS ID # 56323
(www.nmlsconsumeraccess.org)
Intercoastal Mortgage Company is an Equal Housing Lender.
You can get an idea of what you can afford based on monthly income and monthly debt. Most loans have a maximum debt-to-income ratio for qualification purposes. The mortgage industry uses a borrower’s GROSS monthly income as a basis for this ratio. Most borrowers don’t know their monthly debts and usually think it is higher than what the industry may calculate. For example, if a borrower has 3 credit cards with a total outstanding balance of $900, what is their monthly debt? Many consumers might think their monthly debt is $900. In reality, it would be the total of the monthly minimum payment for all three cards and could be as little as $25 per card – or $75.
Once a credit report is run, a number of potential issues may surface. You may have a score that is preventing you from qualifying for certain loans due to a creditor reporting inaccurate information on your credit report. You may have a high balance on a credit card that is impacting your credit score. If you need time to remedy these issues, you can address them early on so that a purchase settlement is not delayed.
There are potentially many loan programs available to you as a borrower. A sample list may include Conventional, High-Balance, VA, FHA, VHDA, USDA, Jumbo, primary residence, investment properties, etc. Some of these require little or no money down, whereas some may require a minimum down payment of 20% or more. It is not fair to assume that your Realtor will know all of the requirements for loan qualification. Perhaps you had a short sale 3 years ago – if that’s the case, you may only qualify for an FHA loan based on that information.
You may have a competitive advantage over other buyers if there are multiple offers on a property. If you have filled out a loan application and your lender has run your credit report, you can obtain a conditional loan approval letter from your lender. If you are interested in a sought after property, you may be able to submit an offer with a closing date weeks earlier than if you had not spoken to a lender. The approval letter can also be strong enough to convince the seller that your offer is the best and safest of all the competing offers.
If you need to liquidate funds for closing, obtain a gift from a family member or provide documentation that is not readily available, you can be made aware of these needs well in advance. We all have enough stress in our daily lives to not have to have added pressure of trying to get qualified for a loan in a short period of time.
A: Adjustable-Rate (ARM)
This is a mortgage in which the interest rate floats up or down according to a specified index. The interest rate is “adjusted” at certain time intervals (such as six months or one year), usually having a “cap rate” or maximum rate of change per adjustment interval (such as 1%, or 4%). Terms such as “one year ARM” generally identify the adjustment interval (interest rate adjusted after one year).
This is a unique type of loan, as it is rather short. You make a monthly payment for 5 – 7 years, based on a term of 30 years. There’s often a low interest rate, and it can be easier to qualify for this versus a traditional 30-year-fixed. A balloon mortgage can be an excellent option for many home buyers. There is, however, a risk to consider. At the end of your 5-7 year loan term you will need to pay off the outstanding balance. This usually requires you to either refinance, sell your home, or convert the balloon mortgage to a traditional mortgage at the current interest rate.
These loans are neither insured nor guaranteed by the government. As such, conventional loans represent a greater risk to lenders than government backed loans. Conventional loans can start with as low as 5% down, but if you can put at least a 20% down payment (80% LTV) you can avoid paying private mortgage insurance.
F: Fixed Rate
So why not go on-line to find a mortgage broker that can offer a low interest rate? Because the rate is only part of the equation. Is the broker charging discount points to be able to offer such a good rate? If there are points involved, the lower rate could results in a worse financial scenario for the borrower.
Sometimes it is important to be able to have a face-to-face meeting between the lender and the borrower. Many borrowers would prefer to hand deliver valuable and sensitive personal financial information versus sending it via email or some other electronic format. In addition, it is also comforting for some borrowers to be able to shake hands with the people that will be making the determination of whether a loan of hundreds of thousands of dollars will be approved.
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Another scenario where a buyer can escape the need for a down payment is a loan from the 
A third loan option that has no down payment is a 
Conventional
Contacting a lender to get pre-approved for a loan should be the first action item for anyone that is interested in buying a home. The pre-approval process will typically begin with a phone conversation or a face-to-face meeting between the borrower and the loan officer. The prospective borrower will need to fill out a loan application and give the loan officer permission to run a credit report.
-Permission to run a credit report
-Does the borrower own any properties currently
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After gathering information from the initial conversation, loan application and credit report, the lender may need additional documentation in order to provide a pre-approval letter. Once this information is received and reviewed, a lender should be able to let a borrower know the amount of a monthly housing expense payment they would qualify for. A pre-approval letter is a written commitment by a lender to provide a mortgage loan to a borrower. With a pre-approval letter in hand, potential buyers are able to look for properties in their price range with a high degree of confidence that they can purchase a home that fits their needs.
If you are curious about how the process works, check out our previous blog on the entire 
HAZARD INSURANCE
WHAT IS INCLUDED – Be very clear about what is covered and more importantly what is NOT covered. You don’t want to lose something and later find out it wasn’t included in the policy.
BUSINESS NEEDS – Do you have a home office? There are both property and liability business exposures that most standard homeowner policies don’t address, as well as low levels of coverage. The typical policy appears to be around $2,500 for in-home office equipment. And while that may sound like enough, by the time you add the costs of your computer, software, tablet, printer, scanner, phone, furniture, etc., it could very well exceed that amount. You’ll need to find coverage that can include all of your home office equipment and supplies.
Most loans require the borrower to pay for property taxes and homeowner’s insurance on a monthly basis as part of the mortgage loan payment. When property taxes are due (typically twice a year), and homeowner’s insurance (annually) the lender will pay the bills out of the escrow funds.
–Government Recording Fee – fee charged by government to record the deed of trust
To apply online,