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When considering the most competitive mortgage rates, you need to have a full understanding of what a mortgage is and what it entails. A mortgage is a legally binding agreement between a bank or another creditor and the loan holder in which property or real estate is used as collateral. The borrower receives money in exchange for the title of the debtor’s property, making payments with interest over a set period of time until the debt is paid off.
In most cases, mortgages are used for homeownership. Most people purchasing a home do not have enough cash to buy it outright. Getting a mortgage depends on many factors, but it makes homeownership possible for individuals and families who otherwise could not afford to do so.
The loan will be set up with a specific repayment time (term), interest rate, and payment per period, usually a month. These are all critical factors in researching the most competitive mortgage rates and determining what is right for you.
The loan term dictates how long the borrower has to pay back the mortgage. The interest and monthly payments will be determined by a number of factors beginning with the term.
The standard mortgage term in the U.S. is 30 years, but there are a number of other options available as well. When all payments are made in a 30-year term, the house is paid off in full in 30 years. There is still a difference based on whether the rate is fixed or adjustable. With a fixed rate, the payment remains the same each month for the duration of the loan. There are also variable adjustable-rate loans where the payment can fluctuate, either through the entire term or after a specified time period.
For you, the most competitive mortgage rates may lead you to a 30-year term, where the monthly payments are lower. In a fixed rate, you know exactly what you need to pay each month and can even refinance if you find you can get an even lower fixed rate.
Another common mortgage loan in the U.S. is the 15-year term. If you can afford to pay higher monthly payments, seeking the most competitive mortgage rates over 15 years may be the answer for you. This would allow you to pay off the mortgage in half as much time in the more traditional 30-year term, generally with a lower interest rate. Because the time and rate are shorter, you would also save much more money in interest.
While a fixed rate can give you a consistent payment throughout the loan term, there may be reasons that an adjustable-rate is appealing to you searching for the most competitive mortgage rates.
With an adjustable-rate mortgage, the interest rate can change throughout the term of the loan or it can change after a period of a fixed rate. The initial rate is generally lower than a fixed-rate mortgage before being adjusted based on the particular index it is following.
The most competitive mortgage rates for adjustable-rate mortgages are within a margin that varies with the index. Although there are others, most are tied to one of three major indexes. The Monthly Treasury Average (MTA) is a maturity yield on the one-year Treasury Bill (T-Bill) as tracked by the Federal Reserve Board.
A second common index is the London Interbank Offered Rate (LIBOR), which is what most international banks charge each other on larger loans. The interest rate is calculated and published each day by the Intercontinental Exchange.
The third index is the 11th District Cost of Funds Index (COFI), which is a monthly weighted average of interest rates in three western U.S. states. The rates are offered by financial institutions in Arizona, California, and Nevada.
Before choosing from among the most competitive mortgage rates, you need to know what information you will need to apply for a mortgage and how it can affect your interest rates if you are approved.
Key factors to whether you will be approved for a mortgage are your credit, income, and available funding. Your credit score will be a huge determining factor in getting a loan and what the interest rate will be. The better the credit score looks, the more likely you are to be approved and have lower monthly payments.
Income is more than what your salary is or how much money you have on hand. Lenders are looking for a consistent income so not holding a steady job or changing jobs frequently can work against you in the application process.
Finally, your available funds are germane to the application because you will need to pay closing costs (and sign more paperwork than you can imagine!). The more money you can put as a downpayment, the lower your monthly and total costs will be.
In addition to looking at your credit score, mortgage lenders will analyze two ratios to determine your ability to afford the loan. One is a front-end ratio, which is the same as a housing expense ratio and the other is a back-end ratio, also referred to as a debt-to-income ratio.
The front-end ratio is the monthly percentage of your yearly gross income (from a steady job) to mortgage payments. Although many lenders and borrowers focus only on the mortgage principal, the total mortgage costs also include taxes, interest, insurance, and sometimes even utility bills. The magic number is 28%. Though not a hard and fast rule, most lenders do not want your total mortgage to exceed 28% of your gross income.
Finding the most competitive mortgage rates will also depend on your back-end ratio, which is the percentage of your income required to cover all your debts. This is where credit card payments, car notes, and any other loan payments or regular financial obligations come into play rather than just the mortgage payment. For this category, most lenders prefer 36%. Again, this is not a set figure but it is most commonly used.
Exceptions may be government-sponsored loan programs, Veterans Administration mortgages, and Federal Housing Administration loans that may allow a debt-to-income ratio up to 45 percent. Some lenders also offer incentives and lower rates for first-time homeowners, so if you are a first-time buyer, make sure to see what benefits a financial institution is willing to include in your mortgage application process.
One of the best advantages of getting the most competitive mortgage rates is to be pre-approved for a mortgage loan. As a potential borrower, you also have the option to be pre-qualified, which is based upon how creditworthy you are. This is particularly common with credit cards.
However, getting pre-approval is a more stringent process and will help you more when obtaining final approval. The lender of your choice will talk with you about the loan process and will check your credit. A pre-approval letter will come with an estimation of the maximum amount you can borrow. This provides an advantage in the house buying process because the seller will see that a lender is confident you can make a solid offer within your price range.
Additionally, you can use one lender for the pre-approval letter and another one for the mortgage application if you choose to. The process may go faster with a familiar lender, but you may find that you work better with another lender during the actual loan application process.
There are several online sources to find the most competitive mortgage rates. They are invaluable sources that give you rate information for a number of terms for a possible loan, not just the more traditional 30-year mortgage. This includes various terms with fixed interest rates, adjustable rates, and combinations of the two.
Bankrate surveys national mortgage lenders and updates various fixed interest rates and adjustable yields every weekday. It also has a calculator where you can put in what type of mortgage (including refinancing), the zip code of the property, your credit score, and the amount of the property and loan you are seeking to let you see specifically the most competitive mortgage rates for your situation.
U.S. News and World Report conducted a study on the top mortgage lenders of 2019. The report identified a number of companies as tops in specific categories, given that each borrower’s needs are unique. The areas ranged from customer satisfaction to adjustable-rate mortgages to specific mortgage loan programs for veterans and USDA loans for those who may struggle to get a more traditional mortgage.
Consumer Reports links to mortgage information website HSH Associates, which has a weekly update and analysis on how to find the most competitive mortgage rates. CR also provides tips on how to get the best mortgage rate with your own financial steps.
With the Federal Reserve’s July announcement that it will lower interest rates, this may be a great time to find the most competitive mortgage rates for your situation. With already relatively low mortgage rates, those who have been considering homeownership could be looking at a prime opportunity to do just that.
This could be particularly helpful for those who already have an adjustable-rate mortgage or are interested in procuring a home loan with possibly the lowest rates they will see in a while. Interest rate decisions by the Federal Reserve don’t affect those with fixed-rate mortgages, but that doesn’t mean you have to stay put either. This could be an ideal time to refinance and lock in a lower rate than you are currently paying.
Taking full advantage of today’s lower interest rates still involves having a healthy financial situation. The best way to take advantage of the lower rates is to have strong credit and to put down at least a 20% deposit. Being able to put down 20% initially saves the borrower a lot of money because anything less than that requires extra insurance payments. The more you can put down, the better chance you have of securing the lowest interest rates and saving a substantial amount of money down the road.
The combination of the historically low rates and the Fed’s decision also points to optimism for the near future. Borrowers may see the most competitive mortgage rates in years with the already low mortgage rates likely to continue. There is a real possibility they may go even lower, which bodes well for those who need a little time to optimize their financial portfolio before applying for a mortgage.
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