Mortgage rates have slowly started to rise, but it’s still a buyers market. Freddie Mac pins the national average for a 30-year fixed rate mortgage at 3.94%. That’s not quite as good as the historic low of 3.31% from 2012, but it’s roughly ten percentage points down from the slight uptick in 2014.
Rates are low, but that doesn’t necessarily mean buying a home is right for you at this moment. Taking on debt is a decision that should never be made in haste. But, if you’ve crunched the numbers and are certain that home ownership is for you, now is a great time lock in a great rate.
What is a mortgage?
A mortgage is a loan designed to help you finance the purchase of a new home. Instead of fronting several hundred thousand dollars yourself, you take out a mortgage to pay the lender back over time.
Depending on which type of mortgage you choose, you might be required to make a downpayment of anywhere from 3% to 20% (or more) of the total loan amount. The more you’re able to put down, the better rate you’ll get — and the less you’ll pay in the long run.
Types of mortgages
All mortgages fall into one of two buckets: government-insured loans and conventional loans. Conventional home loans aren’t insured or guaranteed by the federal government. They’re offered by private entities like banks, credit unions, or private lenders like QuickenLoans.
Because they aren’t guaranteed by the government, conventional loans are more risky for lenders. That usually means they require a higher down payment (around 20% of the home cost or more).
Government-backed loans, on the other hand, come in several flavors:
FHA loans are the most typical type of mortgage for all types of borrowers — especially first-time buyers. These loans are funded by private lenders and insured by the government. The advantage is that you’ll get the lowest down payment possible (even as low as 3%), but that comes at the expense of mortgage insurance.
VA loans are offered to military service members and their families. On top of a simple qualification process, these loans have one of the best perks of all types of mortgages: Some VA loans offer 100% financing. In other words, some borrowers can get a VA loan without making a downpayment.
The United States Department of Agriculture (USDA) runs a loan program for rural residents who have a steady low or modest income. (That means the income must not exceed 115% of the adjusted area median income.) One of the major benefits is that USDA loans have lower interest rates than conventional loans.
If you’re new to house-hunting, read our first-time home buyer’s guide to help determine which type of mortgage is best for you.
Should I refinance my mortgage?
Refinancing your mortgage can save a significant amount of money in the long run, but not always. Sometimes the costs associated with getting a lower interest rate can wind up being more expensive than keeping your current loan.
Evaluating the cost
Refinancing your mortgage is never free. Many banks advertise “low-cost” mortgages and refinancing programs, but there’s really no such thing. In fact, refinancing a mortgage comes with as many costs as the original mortgage: closing costs, mortgage application fees, title search fees, and attorney’s fees. In some cases, you might even have to pay for things like appraisals and recording fees.
To accurately evaluate your potential savings, make sure you consider the extra costs. Here are just a few ballpark figures to get you started:
Common mortgage refinancing costs
- Mortgage application fee: ~1% of the total loan
- Loan origination and document preparation fee: ~1% of the total loan
- Attorney fees: $500-$1,000
- Title search fee: $500-$800
- Home appraisal: $200-$700
- Recording fees: $25-$200
Let’s say you are refinancing a $180,000 mortgage. If you paid the bottom end of each of those refinancing costs, you’d spend almost $5,000 just to refinance your mortgage. But if you expect to save more than that by refinancing, it could be worth it.
Just remember that depending on the time frame you choose, refinancing your mortgage can be a long-term play that results in a higher monthly payment. Use our tool below to help you estimate how much you could save by refinancing your loan and determine whether it’s your best financial move.
Preparing for your mortgage: Must-know terms for home buyers
If you’re looking to purchase a new home, there are a few terms you should know before starting a conversation with a lender. (And if you aren’t sure whether buying is right for you, check out our guide on buying a new home.)
What is a mortgage APR?
A mortgage APR is different than the interest rate.
The interest rate is the cost you will pay each year on your borrowed money. It doesn’t include any fees or charges that come with the loan.
The APR, or annual percentage rate, is usually higher than the interest rate, but it gives a more broad overview of the money you’ll pay. In addition to the interest rate, it wraps up points, mortgage broker fees, and other charges that you pay to get the loan into a single percentage rate.
What is an escrow?
An escrow (sometimes called an impound account) is a chunk of money set aside by the mortgage lender to pay certain property-related expenses.
Every time you make a payment on your mortgage, a percentage of that money goes straight into your escrow account. So instead of having to pay large bills once or twice a year, like property taxes, the escrow account takes care of it.
Escrows are sometimes required by law, but most lenders themselves require that you pay your taxes and insurance using escrow so they can ensure your bills are paid.
What are closing costs?
Closing costs are a variety of fees that are paid as you close on your new home. At that moment, the title is transferred from the seller to the buyer. Depending on the situation, both the buyer and seller might face closing costs.
According to Zillow, closing costs are usually around 2% to 5% of the total mortgage, which can be a hefty expense.
What is a good down payment?
Unless you qualify for certain VA loans, your mortgage will probably require a down payment. The ideal down payment is around 20% of the total mortgage amount, but is it really that important to put that much down?
As of late, low and no down payment mortgages are becoming more prevalent. Case in point: Flagstar, one of Michigan’s largest banks, offers a 3% required down payment, plus up to $3,500 toward closing costs. It’s a tempting offer, but let’s not forget that an abundance of risky mortgage practices led to the housing market crash of 2007.
If there’s one thing for certain, it’s the more you put down, the better rate you’ll get, and the less money you’ll pay over the life of the loan. The difference between a 4% and 6% interest rate over 30 years can be astronomical.
Why do good down payments matter?
Let’s compare two mortgage scenarios for a $200,000 home.
|Loan||$200K FHA loan||$200K Conventional loan|
|Mortgage period||30 years||30 years|
|Down payment||$6,000 (3%)||$40,000 (20%)|
|Approximate total interest paid over the life of the mortgage||$174,916||$149,209|
Even with the same interest rate (which would never be the reality), the conventional loan would save more than $30,000 in interest simply by paying 20% up front. Odds are, the FHA loan with a lower down payment would have a higher interest rate, and the conventional loan savings would be even higher.
Choosing the right lender
APRs and interest rates help to narrow down your choices, but they aren’t the only factors you should consider. Before you commit to a particular lender, ask the following questions — and don’t settle for a lender until you’re satisfied with the answers.
- What is the loan estimate? A loan estimate is a summary of all the fees you should expect to pay, and it’s required by law.
- Do you offer rate locks? Interest rates fluctuate all the time. Some lenders will lock your rate at the expense of a percentage point.
- Do you guarantee on-time closings? If you aren’t able to close on time, you might have to pay a penalty to reschedule your movers — or ever worse, lose your house. If your lender doesn’t guarantee on-time closings, just know there’s a chance that the process could be delayed.