There are many factors that come into play when shopping for a mortgage. For some, their interest lies in the size of their monthly payments, however, from my experience I find that the majority look for the lowest interest rate. Now, for someone venturing through this process, there are several common questions that come to mind that you should discuss with your lender. Let’s take a moment and address them one-by-one before you consider signing on the dotted line.
What kind of interest rate can I get?
Of course this is one of the most common questions one would ask, and I think we all know what the answer is based on – you guessed it, your credit score and personal finance history.
Now you may be wondering what the difference is between having a great credit score and an average credit score when it comes to getting a low interest rate. According to MyFICO.com, the best interest rates are still available for those with scores between 760 and 850. At today’s rates, those scores would get an interest rate of 4.2% versus an interest rate of 5.1% for someone with a middling score between 620-639.
So yes, obviously the higher your credit score the better your interest rate. However, there is also a possibility that you could get a little bit of a better rate if you have more equity and higher income, meaning that there is more equity in the home and your debt to income ratio is lower.
Also as a side note, it’s important to keep in mind though that while rates are pretty much standard throughout the industry, unless you lock your rate, it will fluctuate, which is something that you don’t want to deal with later if you can take steps to avoid it now.
Does my rate come with points?
This is also known as buying down a rate. Points are fees that you can pay at closing that are intended to obtain a lower interest and thus, a lower monthly payment. However, in this market you’ll rarely see homeowners buying rates down because of the fact that most homeowners refinance every three years and it simply doesn’t make sense to buy down our rates and pay the fees that come with it.
Let it be known that when you’re shopping for a mortgage the lender makes money in one of two ways. The first way is to charge points upfront which would give you a little bit of a lower rate. The second way is for the lender to charge a little bit of a higher rate and make the points off the back of the rate, meaning you don’t pay money upfront but you will pay a little bit of a higher rate. In this scenario you must check and see if that makes sense. Does saving a point or two points and loan costs makes sense compared to paying a little bit every month extra because of the higher rate? Be sure to do the math.
Is it a fixed-rate or adjustable?
My thoughts on this are that unless you plan on keeping the same loan for long period of time, then it doesn’t make sense to go with a 30 year fixed rate loan. This is due to the simple fact that most people refinance on average every three years. So why would you get a 30 year fixed rate loan which is the most expensive loan out there in the conventional world, when you know you’re going to sell your house in three to five years?
We have been brainwashed by the banks to always get a 30 year fixed rate loan (the most profitable loan for banks because it carries a higher rate) even though over 97% of homeowners refinance every three years.
When can you lock my rate?
In the simplest of terms, a rate lock on a mortgage is a guarantee from the lender that your rate will remain the same no matter how rates fluctuate throughout the industry. The fact is, the only thing keeping a lender from locking your rate is their internal guidelines. Some lenders will lock your rate with just your name and Social Security number and others have to fully underwrite your loan and approve you before they lock your rate. Also, a lock rate usually has a small window of between 30 to 60 days, so if you can, try to have your closing fall within that period.
Will I need to get private mortgage insurance?
There are many companies out there that are offering loans without private mortgage insurance or what they call LPMI (Lender Paid Mortgage Insurance) where you pay a little bit of a higher rate and that covers the insurance for you (lender pays it) but typically if there’s less than 20% down payment there is a need for private mortgage insurance except in the case of VA loans.
What fees can I expect from you?
Typically lenders origination fees range anywhere between 1-3% of the loan value to cover the costs of processing the loan, and rather than getting collected from you at the time of settlement, this one-time fee is taken out of the amount that you borrow. In addition to the lender fees, there are also escrow and title fees and some out-of-pocket fees to be aware of, so it’s best to keep that in mind. However, overall on a typical loan, lenders and brokers are charging between 1 to 2.5 points.