Tips to secure the lowest possible home loan rate
Fixed loans, adjustable rate loans, interest-only loans; 10-year, 20-year, 30-year terms: it seems like there are as many home loans out there as there are home owners. And if you don’t have experience sorting through all the mortgages out there, the prospect of searching for a loan can feel daunting and overwhelming.
But it doesn’t have to be that way. Educating yourself before you start shopping for home loans can make it easier to decide what the best mortgage product is for you. And I can help.
Fixed Rate Mortgages
Since the housing bubble burst in 2007-08, fixed rate mortgages have become the staple of the market. These home loans are ideal for risk-averse individuals, because – like the name implies – the interest rate stays the same over the life of the loan. So the economy and housing market could implode around you, but your monthly mortgage payments wouldn’t change a dime.
Adjustable Rate Mortgages
Also known as ARMs, adjustable rate mortgages often have a lower interest rate than a fixed rate mortgage – at least at the beginning. During the loan’s introductory period, borrowers get an interest rate that’s often up to a percentage point lower than a comparable fixed rate product. Once that introductory period is over, however, interest rates increase based on market conditions.
ARMs got a bad rap during the recession. That’s largely because homeowners looking to get more property than they could really afford took advantage of the low interest rates offered up front on these loans, without considering what those rates would do after the introductory period ended.
These home loans work just like they sound. During the introductory period of an interest-only mortgage, you’ll only pay interest on the loan, not the principal. Then, once the introductory period ends, the principal will be amortized over the rest of the term. This leads to super-low monthly mortgage payments up front, and high payments after that.
Understanding a Mortgage’s Term
The next step to understanding how home loans work is by learning about the length of the loan. Fixed rate mortgages come in terms anywhere from eight years to 40 years. An ARM’s term includes two numbers, for example, 7/1: the first number is the length of the introductory period (in this case, seven years), while the second number represents how often the interest rate is recalculated following that introductory period (here, it’s calculated every year). Interest-only loans also have introductory periods – usually five or ten years – and a fixed term after that.
Comparing Home Loans
Knowing the difference between all these mortgages is vital when the time comes to compare to them. Looking at a 30-year fixed rate loan next to a 7/1 ARM can be misleading and confusing. Instead, compare apples to apples – like two 15-year fixed rate home loans – instead of apples to oranges. You want to pay particular attention to the annual percentage rate, or APR. This value is the clearest indicator of how much you’ll pay over the life of a loan, because it takes the loan’s interest rate and applicable fees into account. The lower the APR, the less you’ll pay in interest over the life of the loan.
Getting a Discount
As with most things in life, you can get a discount on your mortgage’s interest rate – but be prepared for that discount to come at a cost.
Lenders may agree to give you a lower interest rate if you pay a discount point up front. A discount point is really pre-paid interest; you hand over the cash up front, and the lender cuts the interest rate on your loan. This is where checking the APR comes in; if the APR for the mortgage is lower without the discount point than with it, it’s probably not a good deal.
Getting the Right Help
If all this information still has you feeling overwhelmed, don’t worry. That’s why mortgage brokers exist.
These mortgage professionals help connect borrowers, like you, with lending institutions. Unlike a bank or credit union, which is limited in the mortgage products it can show to borrowers, a mortgage broker can show you a wide range of home loans from a wide range of lenders. This can save you time, and also put you in touch with the best product for your specific situation.