Shopping for a Low Interest Rate Mortgage Loan? Is Lowest the Best?
We all want to get a good deal, if not the best deal around. On one hand finding low interest mortgage loans in 2012 is not really so difficult. Mortgage rates are at historic lows.
However, shopping for a low interest mortgage home loan is complicated. First, you have to overcome the technical language of comparing ARMs to FRMs. Then you are hear all kinds of phrases with abbreviations like LTV, DTI, PMI, APR. Finally, when it comes time to get a quote, not only do you have to compare interest rates over different products and loan terms, but you also have to compare the whole mortgage loan package including interest rates and fees.
In order to get the best interest rate for you mortgage take the following steps:
- Learn about mortgage fees and mortgage rates.
- Compare different types of loans
- Prepare your finances and shop around
- Shop around
Mortgage rates and Mortgage Fees
If you are looking for low interest mortgage home loans, then make sure that you are comparing apples to apples and oranges to oranges. Even though mortgage lenders are required to provide you with accurate information about rates and fees, it is not easy to compare. One popular term used is APR (annual percentage rate) based on the interest rate, the term (length) of the loan, and upfront fees. However, especially when you are in the beginning mode of searching for a home loan those fees are not always available.
Types of Fees:
Basically, to make your shopping easier, break down the fees into three categories:
- Bank fees: Including application fees, origination points, and discount points (to get a lower interest rate).
- Third party fees: Including appraisal, title, and legal fees.
- Escrow and Prepaid fees: Including prepaid insurance, property tax and interest.
When shopping for a mortgage pay attention to the first category, bank fees. Third party fees are similar, although it pays to ask for discounts (especially as regards title insurance). Escrow and prepaid fees are not set by the bank. Find out the expenses, as they will affect your DTI and amount of mortgage you can afford.
Comparing fees and rates:
Low interest mortgage loans can come with higher costs. It is common for lenders to offer a lower rate with higher fees. The common method is to buy a lower interest rate by paying upfront discount points. The break-even point depends on the interest rate differential and the amount of time before you pay off the loan. Most borrowers sell their house before the end of the loan and prepay their mortgage.
One common method of selling a mortgage loan is the no-cost loan. Usually the cost is rolled into the interest rate. If you do not want to pay upfront fees from your pocket, then you can either roll the costs into the loan, or take out a no-fee loan.
Low Interest Mortgage - Compare types of loans
Is a low interest rate ARM better than a slightly higher FRM? Sometimes it is difficult to evaluate which type of loan is cheaper. In the 2012 mortgage market, interest rates are low, making a FRM an attractive option.
According to Freddie Mac’s PMMS (Primary Mortgage Market Survey) the average mortgage interest rates for the week of May 31, 2012 were:
- 30-Yr FRM 3.75%
- 15-Yr FRM 2.97%
- 5/1 – Yr ARM 2.84% (margin: 2.74%)
- 1-Yr ARM 2.97% (margin 2.76%)
Quick tip: Check out actual rates, in the mortgage table below, offered by Bills.com mortgage providers.
Whenever you compare rates remember to compare similar products. If you choose an ARM, then you will be carrying additional risks. The early gains may be offset by a higher interest rate. In addition, the new payment may be too high and unaffordable. Make sure that you evaluate different scenarios, including the worst-case scenario in the ARM.
Getting a Low Interest Mortgage Loan - Prepare your finances and Shop around
Interest rates are constantly fluctuating based on market conditions. The years 2011 and 2012 have recorded historically low interest rates for mortgage home loans. However, no matter when you are looking for a loan, there will be fluctuations based on your financial situation.
Lowest interest rates are available for borrowers with low risk profiles. That means having a:
- Low LTV: The general rule of thumb is to keep your LTV under 80%. Lenders interest rates will vary depending on your loan amount and LTV.
- High FICO score: Low interest rates are available for borrowers with excellent credit, a FICO score over 740.
- Low DTI: In order to qualify for a low rate you need a DTI score of about 36%, although this will vary by loan type and lenders. A FHA loan, for example, is available with a DTI ratio of 43%.
- Clean Credit History: Lenders will deny your application, or offer higher interest rates if you have late payments, collection items, or previous bankruptcies on your credit report.
Before you begin to purchase a home or refinance your mortgage, prepare your finances in advance. By taking the following steps, you can ensure that you will receive the lowest mortgage rates available: