Pamela Peredo

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Buying a home with a mortgage is a big decision. Usually, a bank or mortgage lender will finance the mortgage. However, as a home buyer, you need to know how to apply for a mortgage and where to find the lowest mortgage rates.

But first…

What is a Mortgage?

Understanding what a mortgage is will be important before you apply for a loan or decide where to find the lowest mortgage rates. Mortgages are legal documents you sign when you have an initial loan or refinance a loan for buying a house. This document is a debt instrument that is secured with the collateral of your property or house. The document gives your lender the right to take your house or property if you don’t repay the loan. 

Mortgages and Loan Repayment

With a mortgage, a borrower repays the loan and interest to a lender over several years until the borrower fully owns the property. Mortgages are also called “claims on property” and “liens against property.” There are different types of mortgages, such as fixed-rate mortgages and adjustable-rate mortgages. You need to understand the difference if you are to get the best mortgage deals.

Before You Apply for a Mortgage

It cannot be stated enough that before you apply for the best mortgage rate offers, you have to have a credit history, a good credit history score, the income to pay for the mortgage, and a low debt ratio. A lender may not approve your mortgage loan application if you do not have these financial basics. You can build a history score and a good credit history score by having a secured credit card or a retail credit card where the retailer reports your payments to a credit bureau or a student card. Building credit for a mortgage also requires proof of income and low debt.

Fixed-Rate Mortgages

where to find the lowest mortgage rates

The lowest mortgage rates depend on your financial situation and how long you plan to stay in your home. You can choose between fixed-rate mortgages and adjustable-rate mortgages. A fixed-rate mortgage is a mortgage loan with a fixed interest rate. This rate exists for the length of the loan. Unlike an adjustable-rate loan, the fixed-rate won’t change. The rates can be either amortized or non-amortizing loans.  The amount of interest you will pay for the loan depends on the mortgage term, the length of time it will take you to pay off the loan. 

Traditional lending institutions such as banks offer fixed-rate mortgages of 30, 20 or 15 years. A 30-year mortgage often popular for borrowers because the term offers the lowest monthly payment. However, a 30-year mortgage has a higher cost, because the extra time for the term is paid as interest. In contrast, the monthly payments as the principal for shorter-term mortgages are higher and the principal is paid off sooner. Shorter-term mortgages often offer lower interest rates so you can pay more of the principal. These shorter-term mortgages may cost less than a 30-year mortgage.

What are Amortized Fixed-Rate Mortgage Loans?

When you are looking where to find the lowest mortgage rates, you might consider an amortized fixed-rate mortgage loans. Amortized fixed rates are fixed rates of interest with installment payments that a lender schedules. For example, a lender may ask the borrower to pay on the mortgage every month for the life of the loan. With a fixed-rate amortizing loan, a borrower pays the principal (the main debt) and interest for each payment. As the loan matures, (grows older), the amortization schedule set by the lender requires the borrower to pay more of the principal, which is the main part of the debt and less interest with the mortgage payments.

Non-Amortizing Fixed-rate Loans

Fixed-rate mortgages can be non-amortizing loans. You might come across these when you are lookingwhere to find the lowest mortgage rates. Non-amortizing loans are usually referred to as balloon-payment loans or interest-only loans. Balloon payments are lump sum payments that require higher dollar amounts than regular monthly payments.  These payments are made at a lender’s specified intervals, or paid at the end of a long-term balloon loan. 

Balloon Payments

Benefits of Balloon Payments

The benefits of a balloon payment are that the initial amount of the cash you must pay is less than a standard loan agreement.  This type of loan often has a lower, fixed interest rate and smaller monthly payments. A lender may structure the loan to charge the borrower’s annual deferred interest. Lenders have some flexibility in the structure of the loans in how they can structure fixed interest rates. The interest is deferred and calculated based on the borrower’s annual interest rate. The deferred interest rate is added to the lump sum payment the lender requires. 

Disadvantages of Balloon Payments

This deferred interest rate may make the last payments too expensive for some borrowers. In contrast, an interest-only fixed-rate loan requires borrowers to pay only interest on the scheduled payments. The loans charge monthly interest that is based on the fixed rate. There is no payment of the principal until a specified date.

Benefits of Fixed-rate Mortgages 

Looking into where to find the lowest mortgage rates might make you seriously consider a fixed-rate mortgage. The benefit of these interest rates is they are all fixed. It is also easier to compare closing costs for a fixed-rate mortgage. In contrast, an adjustable-rate mortgage requires comparing closing costs and introductory interest rates that may go up and down while you are comparing rates. 

You also need to consider the length of the introductory period, and how much the interest rate can change each with each rate adjustment over the term of the mortgage. The fixed-rate mortgage could be the best mortgage for you if you need a consistent payment schedule at a consistent interest rate.  Fixed-rates are useful if you are worried about rising interest rates that might make your payments higher. You also may consider a graduated-payment mortgage. A graduated payment loan has lower payments to start but the payments gradually increase over time.

Who can Benefit From Fixed-Rate Mortgages?

Not everyone benefits from fixed-rate mortgages when they are searching for where to find the lowest mortgage rates. Those who benefit from these mortgages are people who plan to stay in one area and in one house for a long time. A fixed-rate is a long-term commitment requiring steady payments over 15, 20, or 30 years. A person with a fixed income that probably won’t go up should consider a fixed-rate mortgage.

Disadvantages of Fixed-rate Mortgages

It’s easier to decide on what loan type when you are initially deciding on where to find the lowest mortgage rates. The greatest disadvantage of a fixed-rate mortgage is that if interest rates fall, you are stuck with the rate you have because the rate is fixed. In other words, you can’t take advantage of a national lower interest rate because you are locked into the terms of the loan. 

Refinancing your Loan

If you want a different rate to take advantage of lower rates you must refinance your loan. Refinancing your loan means you must negotiate and agree to different loan terms. Agreeing to new loan terms means you have to pay extra fees called closing costs to start the new loan terms. Typical closing costs are between 2 percent and 5 percent of the loan amount. This can become very expensive. If you have chosen an adjustable-rate mortgage, the interest on your loan would have fallen with the drop in interest rates. However, there are caps on how high an adjustable-rate can climb and how low the caps can fall.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARM) are sometimes the best mortgage rates on the market when you are searching for where to find the lowest mortgage rates, but not always. An ARM is a mix between a fixed and variable interest rate. The loans are usually amortized loans that require steady installment payments. There is a fixed-rate interest in the first few years of the loan. This is followed by a variable rate interest. Schedules for the amortization can be more complex because parts of the loan rates are fixed and parts are variable.

Benefits of an Adjustable Rate Mortgage

In an adjustable-rate mortgage, a borrower typically bets on rates to fall in the future. If rates fall, a borrower’s interest will decrease over time. A hybrid adjustable-rate mortgage allows borrowers to select fixed-rate term before rates adjust to higher interest rates. These hybrid adjustable-rate mortgages are 3/1, 5/1 or 7/1 with an initial rate for three, five or seven years. An initial rate is usually lower than a fixed-rate mortgage for a short time.

Who can Benefit from an Adjustable-Rate Mortgage?

Not everyone can benefit from an adjustable-rate mortgage when they are looking for where to find the lowest mortgage rates. The likeliest candidates for adjustable rate mortgages are shorter-term homeowners, those anticipating greater income, and those who already have the money to pay off a loan.

  • Shorter-term homeowners: Adjustable-rate mortgages last one, five, and seven years. Being locked into a longer-term fixed-rate mortgage doesn’t make sense if you do not plan to stay in the house for a long time.
  • Greater Income Earners: If you anticipating an increase in income, an adjustable-rate mortgage can save you from higher interest payments because the mortgages are shorter-term when you are looking at where to find the lowest mortgage rates.
  • Having Cash Borrowers: Borrowers who have enough money to pay off the loan before new interest rates occur should consider an adjustable-rate mortgage. In addition, borrowers who can accelerate their payments should consider an adjustable-rate mortgage. However, this rate is always a gamble when you are counting on having enough money. Life often intervenes to change plans with circumstances such as accidents, death, sickness and job loss that can end a borrower’s ability to make timely payments.

Disadvantages of Adjustable Rate Mortgages

You are looking for where to find the lowest mortgage rates, and an adjustable-rate mortgage could be the answer for your borrowing needs. However, adjustable-rate mortgages can be more expensive than a fixed-rate mortgage. If interest rates go up, you may have to pay greater rates with the interest.  An adjustable-rate mortgage shouldn’t cost a, well, arm and a leg to a borrower and it’s something of a gamble.

What Happens if You Default on Your Mortgage

Regardless of what loan you choose after being successful at where to find the lowest mortgage rates for your mortgage, defaulting — not paying — on your loan can hurt you financially. The lender can evict you from your house for nonpayment, repossess the house, and sell the house. Eviction and losing the house can hurt you financially because not only will you not have a home, but also the eviction can negatively affect your credit score. It is critical to make your mortgage payments on time.

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