If you've never bought a home before, when you first start shopping for a mortgage it might seem like the obvious way to choose a lender is to pick the one that offers the lowest interest rate. After all, the interest rate on your mortgage will affect both your short-term and long-term financial well-being because it will determine your monthly mortgage payment and the total amount you'll pay for your home.
Little Things Make a Big Difference
Consider this example: Take out a $200,000, 30-year mortgage at 6.5% interest and you'll pay $1,264.14 a month and $455,090.40 (plus your down payment) over the life of the mortgage. Take out that same 30-year mortgage at 5.5% and you're looking at a mortgage payment of $1,135.58 and a total cost of $408,808.80, or a savings of $128.56 a month and $46,281.60 over 30 years. Even small differences in interest rates, like 6.5% versus 6.2%, can make a big difference. In this case, the 6.2% mortgage rate would save you $39.20 a month and $14,112 over 30 years.
However, taking out a mortgage is a major financial decision, and one that, especially for first-timers, is fraught with potential pitfalls. Just as you consider more than just the sticker price when you shop for a car because factors like safety, fuel economy and reliability are also important, interest rate is only one thing you should consider when shopping for your mortgage. (Learn more about finding the right mortgage in Shopping For A Mortgage.)
Why Low Interest Rates Aren't Always a Bargain
Here are some of the other factors you should consider and why they matter.
1) Teaser Rates
These attractively low advertised interest rates are often just a way to get you in the door. The truth about mortgage rates is that they change multiple times a day. If you contact a lender based on a rate they've advertised, the odds of you actually getting that rate are slim.
2) Fees
There are many costs associated with taking out a mortgage besides the interest rate, like closing costs. Just as the grocery store tries to get you in the door by advertising a gallon of milk for $2 but then wants to charge you $5 for the cereal to pour it on, a bank might advertise a lower interest rate than its competitors but then expect you to pay double the closing costs you might pay elsewhere. Points are another area where lenders can make up for low interest rates by charging borrowers higher fees. However, information on fees isn't likely to be available up front - the only way to find out about these costs is to talk to a lender and have them prepare a good faith estimate for you. (Learn more about avoiding extra fees, read Watch Out For "Junk" Mortgage Fees.)
3) Type of Loan
What type of loan you qualify for will affect your interest rate. That great mortgage rate that you see advertised might be for a 15-year fixed conventional mortgage, but your income and savings might only qualify you for a 30-year fixed FHA mortgage, which will have a higher interest rate and a higher long-term cost. (Read Understanding FHA Home Loans to learn more.)
4) Location
Where you live also impacts mortgage rates. One of the first questions any lender will ask you is the zip code where you plan to purchase property. The national average might be 5.41% on a 30-year fixed, but the average rate in New York City might be 5.49% while the average rate in San Francisco might be 5.33%.
5) Credit Score
The best advertised rates only go to borrowers with the best credit scores. The further below 720 your credit score is, the less likely you are to get a rate similar to the advertised rate.
6) Lending Institution Reputation
Just because you've never heard of a particular lending company doesn't mean that it's up to no good, and just because it's a nationally recognized name doesn't always mean it's a safer choice. Regardless of the lender you're considering, do some research to determine how likely you are to get a fair deal when working with that company. The lender who advertises the best rates is not always a lender who will give you a fair deal.
7) Loan Representative
At least as important as your choice of lending institution is the specific person you work with in that company. Unscrupulous people can work for stellar companies, and people who always put their customers' best interests first can work for shady institutions. This is why the specific person who handles your mortgage for you needs to be someone you trust. Whether this person is competent and ethical in qualifying you for a mortgage, selling you a particular mortgage product, and preparing your mortgage paperwork will have a major impact on your life.
Just ask the people who ended up with mortgages they didn't understand and ultimately couldn't afford and today have foreclosures blemishing their credit reports and are back to renting or even living with relatives to get by. They all probably wish they had looked at more than just the interest rate when they took out their mortgages. (What looks like a good deal often amounts to hidden costs. To learn how to find and avoid them, read Score A Cheap Mortgage.)
Conclusion
Mortgage rates change multiple times a day, and they vary depending on your geographic location, the type of loan you want and your credit score. Perhaps most importantly, they don't tell the whole story about the cost of a loan. A mortgage lender might advertise a great rate, but charge a ton of money in closing costs, or promise a borrower great terms, but then present different numbers in the paperwork at closing when emotions are running high and time is of the essence. Looking at the whole loan package, not just the interest rate, will help you get the best deal.
source: http://www.kvbc.com/Global/story.asp?S=10876571&nav=menu107_11_3_2
Last week I got my first peek at the new Good Faith Estimate all lenders will be required to use by the Department of Housing and Urban Development after January 1st, 2010. It is a tremendous improvement over what we have now. They're not even in the same ball park! It is so good, in fact, that I predict the quiet rumblings of criticism I've heard within the industry will grow louder. Why? Because this is one of those rare, government mandated documents that actually and truly helps the people it purports to help: the borrowers! This is not good for those lenders that rely on borrowers' gullibility and ignorance as a crucial aspect of their business model.
A quick overview: the new Good Faith Estimate is three pages long. Within those three pages borrowers will find these helpful sections:
* Important Dates showing how long the rate and terms of the offered loan are valid and the terms of the rate lock.
* Summary of your loan including term, rate, amount, whether it is adjustable, negatively amortizing, subject to a prepay penalty and so on.
* Escrow Account explanation and information.
* Summary of Loan Charges in plain black and white.
* Origination Charges revealing fees charged directly by the lender.
* Other Settlement Charges making clear third party fees not quoted by or given to the lender.
* Instructions clearly explaining which charges cannot increase at closing as well as any limits on increases for those charges that can change at settlement.
* Trade-off Table wherein the lender compares how the payment (rate) and closing fees move in opposite directions for the same loan as the rate moves higher or lower than that quoted.
* Shopping Cart giving borrowers an organized way to compare lenders.
This new Good Faith Estimate is transparency on steroids! Take a look again at those last two items: a Trade-off Table and a Shopping Cart. Lenders like Brian Brady and myself have been providing this kind of understanding for years. We've spent hours explaining the concept of rates vs. costs to borrowers who are often misled by other lenders and even the industry in general. I can not count the number of times I've heard a client remark to one or both of us, "Gee, no one's ever told me this before." I guess we can expect to hear that a lot less often.
I also expect an even greater share of business to come our way. For a number of lenders out there, this new Good Faith Estimate means their model for doing business is going to change. That benefits the borrowers (obviously) but it also benefits those of us who have been doing this all along. As a matter of fact, I am going to start using this new Good Faith Estimate now, along side the older one. Why wait until January 1st, 2010? This is the clearest explanation of fees I've seen yet and it will only serve to educate our customers. As Brian is fond of saying: "An educated customer is our best customer."
source: http://delmar.typepad.com/brianbrady/2009/09/new-good-faith-estimate-debuts-january-1st-2010-but-why-wait.html
Half of all fixed rate mortgages now charge arrangement fees which are based on the amount of money customers borrow, research showed today.
The proportion of providers charging a percentage fee has risen by 14% during the past year to 49% of all fixed rate deals, according to financial website MoneyExpert.com.
The fees vary from just 0.4% of the mortgage size to as much as 2.5%, with an average fee of 0.89%, or £1,335 on a typical mortgage of £150,000.
But for people borrowing larger sums the fees can run into thousands of pounds, with a homeowner taking out a £250,000 mortgage with a 2.5% fee paying £6,250.
Only 4% of fixed rate mortgages with a percentage fee have a cap on the amount borrowers have to pay.
Among lenders who levy a fixed fee regardless of the amount being borrowed, the average amount charged has fallen during the past year, dropping from £860 to £790.
However, the reduction is largely due to lenders introducing low fee or fee-free mortgage ranges, which offset the lack of an arrangement fee by charging higher interest rates.
Only one mortgage had a fee of between £100 and £200 12 months ago, but today 49 different products have a fee of this level.
But the highest fixed fee charged has soared by 25% during the past year, rising from £1,999 in September 2008 to £2,499 now.
Pierre Williams, head of research at MoneyExpert.com, said: "Borrowers looking for a mortgage focus on rate, but fee has to be a consideration particularly when these can run into thousands of pounds. All too often we forget about the fee by rolling it straight into the loan.
"Fees are often linked to loan to value ratios and anyone without a significant amount of equity in their house can expect to pay a hefty fee."
Meanwhile, research by financial information group Moneyfacts.co.uk found that the average cost of a two-year fixed rate mortgage has increased by 0.31% to 5.15% since March, when the Bank of England base rate was cut to a record low of 0.5%.
The rise comes despite swap rates, upon which the deals are based, falling during the same period.
But the average cost of a two-year tracker deal has reduced slightly during the same period, dropping by 0.14% to 3.72%.
There has also been an increase in the number of different mortgages available for people with smaller deposits, with the number of 90% loan to value loans rising by 17 to 106, while there are 80 more 75% LTV deals, giving a total of 509.
Competition appears to be slowly returning to the mortgage market, with a number of lenders reducing the cost of their mortgages during the past week.
HSBC launched a discount mortgage of just 1.99% last week, which went straight to the top of the best buy tables, while Cheltenham & Gloucester, part of the Lloyds Banking Group, and Barclay's lending arm the Woolwich also reduced some of their rates.
They were followed yesterday by first direct, which launched a market leading offset tracker mortgage of base rate plus 2.29%, giving a current rate of 2.79%, and nationalised bank Northern Rock reduced the cost of some of its fixed rate deals by up to 0.4% and introduced a two-year tracker.
Michelle Slade, spokeswoman for Moneyfacts.co.uk, said: "All is not lost for borrowers as competition slowly seems to be returning to the mortgage market.
"The number of mortgages available is slowly increasing and the launch of the sub-2% HSBC deal will hopefully spur other lenders on to reduce rates and bring much needed competition back to the market."
source: http://www.24dash.com/news/Housing/2009-09-08-Half-of-all-fixed-rate-mortgages-charging-arrangement-fees
| 29% |  | Up |
| 50% |  | Down |
| 21% |  | Unchanged |
Will rates rise or remain relatively unchanged? Experts and Bankrate analysts provide their insights.
This week (Sept. 3 - Sept. 9) the experts say: Rates probably are headed down. This week, half the panelists believe mortgage rates will fall over the next 35 to 45 days. Another 29 percent think rates will rise, and the rest believe rates will remain relatively unchanged (plus or minus 2 basis points).
| Experts' comments | Panel |
Inflation fears are overblown. While it is true that the Fed is printing an extraordinary amount of money, that extra money won't cause inflation until it is borrowed (new credit is created). Credit is being destroyed faster than the Fed can print money because consumers have neither the ability nor the inclination to take on additional debt. As these facts become more and more evident, deflationary concerns drive mortgage rates lower. If you missed out on the low rates of earlier this year, get ready, because this fall we may approach the lows in mortgage rates reached earlier this year. Michael Becker, mortgage consultant, Green Pastures Mortgage & Finance, Lutherville, Md. | down |
The economy just can't seem to stabilize regardless of the fact that many experts have declared the recession over. Rates are now nicely under 5 percent but who can qualify? One third of all homeowners are upside down on their mortgages and we have a very understated national unemployment rate in the 9 percent range. Jeff Lazerson, president, Mortgage Grader, Laguna Niguel, Calif. | down |
The daily tech has run its bullish course (higher prices, lower yields) and we should see higher Treasury yields and mortgage rates for 15 to 20 days. We may see a "bouncing along the ceiling" for a week or so as the techs top out and prices stay flat. Presumably that would happen if consequent to erosion in equity prices. This is not the end because the weekly remains bullish, as we should get another dip when the daily gains its bullish steam in about six weeks. Dick Lepre, senior loan officer, Residential Pacific Mortgage - SF, San Francisco | higher |
Seasonal trends push mortgage rates down. Dan Green, TheMortgageReports.com, Waterstone Mortgage, Cincinnati | down |
After sounding like a broken record for months now saying that rates would stay the same, we're starting to see some improvement. As the stock market struggles, we're seeing mortgage-backed securities testing new highs, and if they can remain at this level, we'll see improved mortgage interest rates. If you've been unable to refinance due to decreased property values, touch base with your mortgage adviser to see if one of the new 125 percent RefiPlus loans might work for you. David Kuiper, mortgage planner, First Place Bank, Holland, Mich. | down |
The 10-year is currently trading at 3.34 percent, which is down 35 basis points from two weeks ago. The inflation component is currently at 1.7 percent, which is also down from almost 2 percent earlier this year. ADP said the private sector lost 298,000 jobs -- 85,000 more than expected. It is now becoming clear to everyone that while things are evening out we are still a long way from real improvement as opposed to lessening bad news. Remember, we need job growth to get this all moving again. Mitch Ohlbaum, loan officer, Bank of America, Los Angeles | down |
Without notable market news or government intervention this week, consumers may turn to market analysis regarding the future direction of rates. Currently, the average mortgage rate is only 0.05 percent away from the record low of 5.19 percent. However, the high end of that scale is now slightly lower than before, at 5.53 percent. As we appear to have hit a resistance level within those numbers, we can expect rates to move up within that range between now and Sept. 23. Cameron Findlay, chief economist, LendingTree.com, Charlotte, N.C. | higher |
Even though rates are very low, I'm cautiously paying attention to how the market will react with the concerns of unemployment. If anything, there is a greater potential for rates to slightly increase from today's average. Mark Madsen, mortgage consultant, Raintree Mortgage, Las Vegas | unchanged |
I say unchanged, and one would tend to think that would equate to stability in pricing. I am not saying that. Last year in the month of October, we saw four runs in mortgage-backed securities pricing in excess of 400 basis points, up and down. This translates into rate swings of over 1 percent off the highs and lows. While I am not expecting a repeat, the fact that it happened cannot be lost on consumers that rates can change quickly. Lock when rates make sense and short term, these rates make a lot of sense. Jim Sahnger, mortgage consultant, Palm Beach Financial Network, Stuart, Fla. | unchanged |
| Bankrate's analysts | Panel |
Mortgage rates have pulled back, even as better economic news mounts. Don't wait too long to lock in. The recovery will be weak but the mortgage markets remain very dependent on the Fed's checkbook. Greg McBride, senior financial analyst, Bankrate.com | up |
I expect more of the same -- small changes on a week-to-week basis Holden Lewis, senior reporter, Bankrate.com | unchanged |
source: http://www.bankrate.com/finance/mortgages/mortgage-rate-trend-index8-132129.aspx