All mortgages are not created equal, which is why it’s important to know what today’s mortgage rates are and to have an idea of what each lender is offering to prospective homebuyers so you can make the best choice for your situation.
What is a mortgage?
According to the Consumer Financial Protection Bureau, a mortgage is a home loan extended to you by a lender with the agreement that you will pay back the money you borrowed, plus interest, or the lender has the right to foreclose on your property. Mortgages allow home buyers to borrow money to purchase a home and pay it off over time with interest. This common practice is beneficial because it lets home buyers purchase property without paying the entire price up front.
While most people pursue mortgage loans to purchase a home, it’s not necessary if you have the means to pay cash for your home. Bloomberg reported in June 2019 that 37% of American households either never had a mortgage or have already paid it off.
Factors to consider when shopping for a mortgage:
- The loan size: What is the total amount you are going to borrow? Can you afford the monthly payments on the amount, and will a bank offer you a loan in that size?
- The interest rate: How much is the lender going to charge you annually for borrowing their money and what are today’s mortgage rates? The interest you pay on a loan as large as a mortgage can make a considerable difference in your monthly payments.
- The loan’s closing costs: When you purchase a home, you’ll pay between 2% and 5% of its selling price in closing costs, which may put certain amounts out of reach for some buyers. You need to factor in the closing costs on top of the other financial commitments you’re making with the mortgage and decide whether it’s a realistic amount for you to take on.
- Annual Percentage Rate (APR): This is the fixed yearly cost you’ll pay to borrow a loan, which does not include compound interest. This will add more to the cost of your loan and could make it difficult to afford payments if you stretch yourself too thin.
- Type of interest rate: Is your loan’s interest rate fixed (i.e., it will stay the same throughout the term of the loan) or is it adjustable (i.e., it is subject to change)? The difference between these two types of interest rates — one of which has a fluctuating rate after a certain period of time while the other is “fixed” and stays the same throughout the life of the loan — could be a deciding factor for you.
- The loan term: How long do you have to pay off your mortgage? You’ll save money by paying it off earlier by taking out a mortgage with a shorter term, but it will cost you more each month in the interim.
- The loan’s risk: Many loans have frequently overlooked features, such as payment penalties or fees for paying off the loan, so it’s important to understand what exactly you could be penalized for to avoid it.
Types of mortgages
There are several types of mortgages that potential buyers can take advantage of, although some mortgages, like VA loans, are geared toward certain demographics. It’s important to know your options so you can make an educated decision on which type of mortgage would work best for you.
The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development, helps lower income borrowers. The down payment is much lower, even as low as 3.5% of the purchase price, which makes this type of loan easier to qualify for with fewer funds, plus the credit requirements are not as strict as they can be with other loans.
Also known as a variable rate mortgage, the interest rate of adjustable-rate mortgage starts with a fixed rate and then “adjusts” at a predetermined time. This type of loan is best for buyers who aren’t planning to stay in their home long term and want to take advantage of a low initial interest rate but sell before the loan hits the adjustable phase.
The interest rate of fixed-rate loans remains the same for the entire or almost the entire loan term, making it a smart option for buyers who plan to stay in their homes over the long term. The rate cannot be adjusted up or down, so the downside of this loan is that if mortgage rates drop, a fixed-rate loan won’t drop along with them.
Bridge loans are high-interest short-term loans provide borrowers with a quick cash injection. Typically it enables the borrower to buy time so that they can get longer term financing.
Offered by the US Department of Veterans Affairs, VA loans provide highly attractive interest rates and loan terms to service members, veterans and their spouses. This type of loan does not require a down payment, and the credit requirements are flexible to make it easier for military members and their families to qualify.
The U.S. Department of Agriculture’s Single Family Housing Guaranteed Loan Program provides loans to low and moderate-income borrowers who purchase homes in eligible rural areas. This type of loan is limited by some strict requirements, but the credit score required is more flexible than a conventional loan, so if you live in an area that qualifies for a USDA loan it could be a good alternative to a conventional loan with a large lender.
Preparing for a mortgage: terms to know
Don’t get confused by the jargon; make sure to familiarize yourself with the important terms you should know before exploring today’s mortgage rates.
- Mortgage APR: mortgage APR is the annual percentage rate, or the annual cost you pay for your loan. It includes the loan’s interest rate and other miscellaneous fees you pay over the loan term.
- Escrow: escrow is a portion of your mortgage payment that the lender holds in an account to cover insurance, taxes and other fees until they are due to be paid.
- Closing costs: your closing costs cover title company fees, other miscellaneous fees and escrow company charges during the home buying process. They range from 2% to 5% of the home’s selling price.
What is a down payment and how much do I need?
The amount of money you pay up front — not including the loan amount you take out — is called a down payment. Your down payment, along with the amount you borrow, pays for the purchase of your home. The higher your down payment, the more attractive a buyer you are to the selling realtor.
The industry recommendation is 20% for a down payment, though there are plenty of lenders out there who will accept between 3% and 5% as a down payment. If you pay 20% or more, it allows you to qualify for a lower monthly mortgage payment and a lower interest rate. If you cannot put down 20% or more, then you may qualify for an FHA loan or state and local loan programs.
As you can see in the following table, which uses a basic example of a $250,000 home, with $50,000 of that being paid off up front, the total amount you’ll pay in interest over the long term depends on a number of factors.
|Interest Rate||Down Payment||Mortgage Term||How Much You’ll Pay in Interest over the Loan’s Term|
How to choose the right lender
Your real estate agent often has a go-to mortgage lender they’ll recommend. To be clear, that recommendation doesn’t mean the agent’s lender has the best available mortgage rates. It would still be wise of you to shop around.
Zillow recommends talking to at least three different mortgage lenders in your market. Ask each one for a loan estimate, compare and then look at their online reviews.
Most home buyers borrow from mortgage bankers, which include credit unions, banks and online mortgage lenders. When the lender originates its own loans, it’s called a direct lender. Direct lending has flexible terms and focuses specifically on home mortgage loans. When the lender sells several other consumer products, such as checking accounts, then it’s called a retail lender. Retail lending has very strict terms.
Banks with the best mortgage rates
Guild Mortgage is US News & World Report’s pick for the best lender for 3% down loans. Borrowers need a minimum FICO score of 620 and have a maximum 50% debt-to-income ratio.
Wells Fargo is offering a 30-year fixed rate loan at 3.625% interest rate and 3.719% APR. This lender also offers a 15-year fixed-rate loan at 2.750% interest and 2.969% APR.
**Rates show taken directly from Wells Fargo’s website. Updated as of 2/17/2020
The online lender Quicken Loans has a slightly higher 3.750% interest rate with 4.024% APR for a 30-year fixed rate loan and 3.250% interest rate with 3.694% APR on a 15-year fixed-rate loan.
**Rates show taken directly from Quicken Loan’s website. Updated as of 2/17/2020
The bottom line
Your mortgage rate will depend on several factors — namely, the type of loan you’ve agreed to, the amount of your down payment and the APR. Work with a vetted mortgage lender after you’ve compared loan estimates.
To secure an attractive loan, prepare to put down at least 20% of the home’s selling price. If that’s not financially realistic for you, see which government lending programs you could qualify for and apply or find a lender that’s comfortable with a lower down payment.