You should shop around for the best interest rate.
In fact, the new good faith estimate issued by the Department of Housing and Urban Development (HUD) that took effect January 1 of this year has a new section that you, the consumer, can use to help compare one lender’s rate offering to another.
While you’ve always been able to compare lenders, this is the first time the government has given you your very own rate comparison chart. The “shopping cart” as HUD calls it allows you to record a lender’s rate as well as the total estimated settlement charges. But while it’s important to shop for an interest rate it’s also critical to know not just how but also when you should query potential lenders.
First and foremost, you need to decide on which loan program you’re going to compare. While that might seem a little obvious at first glance it’s really not. You need to decide not only between a fixed, an adjustable rate mortgage ( ARM) and a hybrid. A fixed rate is fixed throughout the life of the loan, an ARM has an interest rate that can vary throughout the life of the loan and a hybrid is an ARM that is fixed for a predetermined period, say five years then morphs into an ARM. In the current rate environment, where interest rates are still near historical lows, most people select a fixed rate.
But you’re not finished. You also need to select a loan term, or its amortization period. The most common fixed rate term is the 30-year fixed-rate mortgage. But most lenders offer fixed rate loans in five year increments beginning with ten-year loans. You can also select a 15, 20, and 25 to go along with a 30 year fixed rate.
When should you choose a shorter term for your loan? When you aren’t stretching to meet payments. Conventional loan to debt ratios prevent you from having more than 41% of your gross income used toward debt payments and mortgage payments. The ceiling for mortgages is about 28% of your income, with the rest of your debt payments going toward a car payment, student loan, or revolving credit card charges. If you have low debt, or are buying a modest home compared to your means (below a debt ratio of 28%), it’s a good idea to get a shorter term.
The difference in interest rates for the full term even for only five years is well worth it, and you build equity, or ownership, that much faster. Plus a higher mortgage payment is a disincentive to go out and run up your credit cards.
Once you select the proper loan as well as the term you can start shopping. But you’re not done just yet. Now you need to compare loan rates to decide where you want to apply for a loan.
You’ll need to give the lenders you call the same facts – what kind of loan you want, how long the loan term will be, how much you want to put down or toward the purchase price, and your credit score.
Keep in mind that quotes you receive aren’t binding on the lender’s part until you actually sign an application and share your financial information like tax returns and pay stubs. You won’t receive a good faith estimate, or binding costs, from the lender unless you have put a contract on a home.
Mortgage rates can change throughout the day. Rate swings of a quarter of a percent, while not a common occurrence does in fact happen, especially in these volatile times. What does that mean?
It means that you need to do your rate shopping not only on the very same day but at the same time of day. You might get a rate quote from a lender on a Friday morning of 5.00 percent then call another lender the following Monday afternoon and get a quote of 4.75 percent for the very same loan.
That doesn’t mean the second lender is always lower than the first lender, it means the markets may have changed and rates in general have gone down. You need to call back the first lender and get their updated rate quote.
Give your lenders the opportunity to earn your business, just make sure they’re all competing under the same conditions: the same loan program at the same time.
In fact, the new good faith estimate issued by the Department of Housing and Urban Development (HUD) that took effect January 1 of this year has a new section that you, the consumer, can use to help compare one lender’s rate offering to another.
While you’ve always been able to compare lenders, this is the first time the government has given you your very own rate comparison chart. The “shopping cart” as HUD calls it allows you to record a lender’s rate as well as the total estimated settlement charges. But while it’s important to shop for an interest rate it’s also critical to know not just how but also when you should query potential lenders.
First and foremost, you need to decide on which loan program you’re going to compare. While that might seem a little obvious at first glance it’s really not. You need to decide not only between a fixed, an adjustable rate mortgage ( ARM) and a hybrid. A fixed rate is fixed throughout the life of the loan, an ARM has an interest rate that can vary throughout the life of the loan and a hybrid is an ARM that is fixed for a predetermined period, say five years then morphs into an ARM. In the current rate environment, where interest rates are still near historical lows, most people select a fixed rate.
But you’re not finished. You also need to select a loan term, or its amortization period. The most common fixed rate term is the 30-year fixed-rate mortgage. But most lenders offer fixed rate loans in five year increments beginning with ten-year loans. You can also select a 15, 20, and 25 to go along with a 30 year fixed rate.
When should you choose a shorter term for your loan? When you aren’t stretching to meet payments. Conventional loan to debt ratios prevent you from having more than 41% of your gross income used toward debt payments and mortgage payments. The ceiling for mortgages is about 28% of your income, with the rest of your debt payments going toward a car payment, student loan, or revolving credit card charges. If you have low debt, or are buying a modest home compared to your means (below a debt ratio of 28%), it’s a good idea to get a shorter term.
The difference in interest rates for the full term even for only five years is well worth it, and you build equity, or ownership, that much faster. Plus a higher mortgage payment is a disincentive to go out and run up your credit cards.
Once you select the proper loan as well as the term you can start shopping. But you’re not done just yet. Now you need to compare loan rates to decide where you want to apply for a loan.
You’ll need to give the lenders you call the same facts – what kind of loan you want, how long the loan term will be, how much you want to put down or toward the purchase price, and your credit score.
Keep in mind that quotes you receive aren’t binding on the lender’s part until you actually sign an application and share your financial information like tax returns and pay stubs. You won’t receive a good faith estimate, or binding costs, from the lender unless you have put a contract on a home.
Mortgage rates can change throughout the day. Rate swings of a quarter of a percent, while not a common occurrence does in fact happen, especially in these volatile times. What does that mean?
It means that you need to do your rate shopping not only on the very same day but at the same time of day. You might get a rate quote from a lender on a Friday morning of 5.00 percent then call another lender the following Monday afternoon and get a quote of 4.75 percent for the very same loan.
That doesn’t mean the second lender is always lower than the first lender, it means the markets may have changed and rates in general have gone down. You need to call back the first lender and get their updated rate quote.
Give your lenders the opportunity to earn your business, just make sure they’re all competing under the same conditions: the same loan program at the same time.
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