There is a lot of confusion when it comes to mortgage rates. You may see rates on the news, TV commercials, internet ads and promotions at your bank but what really are the today’s mortgage rates?
The answer to this question is not straight forward to understand. When it comes to mortgage rates, there is not just a rate that a bank or lender is giving out for the day. Mortgage rates are determined by several factors including:
- loan type
- loan-to-value ratios
- loan term
- loan costs
- property type
Mortgage Rates for Loan Types
When comparing mortgage rates, it is important to look at what loan type is best for your situation. Generally speaking, government insured mortgages such as FHA Loan, VA Loan and USDA loans have lower rates than Conventional Loans.
While the rates may be lower, there are other factors to
consider such as up-front funding fees that the government charges and mortgage
insurance premiums. If you have great credit or a large down payment, you may
be better off with a conventional mortgage loan.
Mortgage Rates based on Loan-to-Value Ratios (LTV)
Mortgages are based on risk for the investors that fund the
loans. One measurement of risk is the loan-to-value (LTV). For example, if a
loan is based on 50% of the home’s value, there is little risk of loss for the lender
if the home is foreclosed therefore mortgage rates are lower.
Mortgage rates based on LTV is not always linear. For example, mortgage rates are typically lower for a 15% down payment than if a borrower applies a 20% down payment. This is due to loan level price adjustments (LLPAs).
While this is counter intuitive, this is because a lender would have some form of mortgage insurance to protect against loss at 15% down but none at 20% down. To get the lowest rates based on LTV, we recommend a 25% down payment.
Mortgage Rates Based on Loan Term
Mortgage rates vary based on the term of the loan. The
shorter the loan term, the lower the interest rates. 15 year fixed rates
mortgage may have a lower rate than a 30 year fixed rate mortgage.
With shorter terms, the rate may be slightly lower however
the mortgage payment will be more because you are repaying your loan more quickly.
Today’s mortgage rates are very close for 15 year and 30
year mortgages. It may make sense to seek a 30 year fixed rate and simply pay
extra principal payments.
Loan Fees and Discount Points for Mortgage Rates
The biggest factor when comparing mortgage rates is the
costs to get the loan. Be certain to compare the lender fees and discount
points required to get the advertised rates. Most of the big banks and online
lenders advertise mortgage rates with thousands of dollars in costs to get the
Many banks, lenders and credit unions have costs such as applications fees, underwriting fees, processing fees and origination fees which add to the costs to get a mortgage (Riverbank has Zero Lender fees!).
To get the lowest mortgage rate, you may have to pay discount points. Discount Points are paying extra fees up front to get a lower than market interest rate. Some people may choose to do this because in the long run a lower rate may save them more money than the up-front cost.
For example, you may have the option to pay $2,000 extra at
closing to get a .25% lower interest rate; let’s assume this saves you $50 per
month; the break even point would be $2000/$50 = 3.3 years. In this example if
you have the mortgage more than 3.3 years you will save by paying discounts
points up front.
In some scenarios paying points may be beneficial, however, discount points are one of the most misleading charges. When the advertised interest rates look very low, it is important to ask what fees are required to get that rate. Many times the big banks and lenders require large upfront costs to get their advertised rates.
How to Compare Mortgage Rates
When shopping for a mortgage, there is no truly easy way to compare mortgage rates on your own. Each bank and lender quote rates, fees and charges differently which makes it hard to determine what loan is best for your situation. The best way to compare mortgage rates is to talk with an independent mortgage broker.
Independent mortgage brokers are experience mortgage experts that can advice clients on how to get the best mortgage for their needs.
Why Use a Mortgage Broker to get a Home Loan?
Using a mortgage broker to get a home loan is the best way to get a mortgage. A mortgage broker will spend time learning your goals and requirements and compare rates at multiple banks and lenders simultaneously. Mortgage brokers offer wholesale rates which may be lower than a consumer can get going through a retail bank or lender.
The best part about using a mortgage broker is that they do
not charge you any fees for their services (for most loan products). They are
compensated only by the lender for assisting the clients through the mortgage
process. The end lender would rather compensate a mortgage broker for a loan
because they are cheaper than having to pay employees as loan officers for
their bank directly.
Clients can save a large amount in up-front costs and get a
very competitive mortgage rate by working with a mortgage broker.
If you are looking to buy a home or refinance your current
mortgage, talk with a mortgage broker today by calling us at 800-555-2098 or
requesting information below.