What You Should Know About Mortgage Rates and Refinancing!
With the recent historical low mortgage rates that the nation has seen, many questions often arise. How does it affect homebuyers and homeowners? Should you consider refinancing, and how will that affect my current mortgage loan? So we decided to answer some of those questions to help you make an educated decision in regards to your mortgage loan.
Buying A Home?
When people decide to buy a home, the first thought is usually where do we start? We often advise first time home buyers to start with the pre-approval process. Getting pre-approved simply means getting with a lender and going over your income, debt and credit. Although many circumstances can affect the amount, type and rate of the loan you may qualify for, this is the first step into purchasing a home. Having a clear knowledge of the price range you can afford will save you a lot of time.
The “You” Factor
In addition to market and economic factors, the rates you’re offered depend largely on your own financial situation. Things like your credit score, credit history, debts, income, and other considerations will all play a role in what rates a lender can give you.
What lenders will consider when setting rate:
- Credit score
- Repayment history and any collections, bankruptcies or other financial events
- Income and employment history
- Cash reserves and assets
- Down payment
- Property location
- Loan type, term and amount
Generally, the riskier you are as a borrower, and the more money you take out, the higher your rate will be.
Do I Need To Put 20% Down Payment?
The simple answer is No. There are many loan programs available now that it may not be necessary for you to come up with that hefty 20% down payment. Some of the most common loan programs available are:
- DPA – Down Payment Assistance Programs; From $0 Down To 1% Down
- FHA First Time Home Buyer: 3.5% Down With FICOS as Low As 550 and Up
- Conventional Programs from Freddie Mac and Fannie Mae 3% Down & Reduced M.I.(Mortgage Insurance)
- VA loans with as low as $0 Down
- Bank Statements ONLY Program/ No Taxes Needed: For 1099 Self Employed Buyers
- Streamline FHA Refinance / With Or Without Income or Credit OK
Selecting The Right Lender Makes a Difference
Rates also vary by lender, which is why it’s always important to shop around when looking for a mortgage lender. Each lender has its overhead and operating costs and thus has to charge differently to make a profit.
To make sure you’re getting the best rate, you can either apply with several lenders at once or go to a mortgage broker, who can do the shopping for you. Brokers can often find lower rates thanks to their industry connections and access to wholesale pricing.
Regardless of which route you choose, make sure you’re comparing the full loan estimate— closing costs included—to accurately see who’s pricing is more affordable.
Mortgage Broker Vs. Direct Lender (Banks)
A broker acts as an intermediary, helping you identify the best lender for your situation and pulling together all the information needed for the mortgage application.
- If you don’t want the hassle of contacting various banks, a broker might be the better option.
A direct lender is just that: A bank or other financial institution that will decide whether you qualify for the loan and if you do will hand over the check.
- If you have a banking relationship with a lender, that may be your best route.
What Is a Mortgage Interest Rate?
Your mortgage interest rate indicates the annual cost to borrow money from your lender. The rate is expressed as a percentage of your total loan balance and is paid on a monthly basis, along with your principal payment, until your loan is paid off.
A 5% mortgage rate, for example, means you will pay 5% of your total loan balance in interest each year. You will pay more in interest at the start of your loan. As your loan’s principal balance goes down over the years, so does the amount of interest you pay each month.
What Makes Mortgage Rates Fluctuate?
If mortgage rates are at 5%, but the level of annual inflation is at 2%, the real return on a loan in terms of the purchasing power of the dollars the lender gets back is only 3%. Therefore, mortgage lenders carefully monitor the rate of inflation and adjust rates accordingly.
The Level of Economic Growth
Higher economic growth levels generally produce higher incomes and higher levels of consumer spending, which means the demand for mortgages tends to propel mortgage rates higher. The reason: Lenders only have so much money available to lend out. Wehn employment and wages decline, leading to decreased demand for home loans, which in turn puts downward pressure on the interest rates offered by mortgage lenders.
Federal Reserve Monetary Policy
The Federal Reserve does not set the specific interest rates in the mortgage market. However, its actions in establishing the Fed Funds rate and adjusting the money supply upward or downward have a significant impact on the interest rates available to the borrowing public.
The Bond Market
The overall condition of the larger bond market indirectly affects how much lenders charge for mortgages. Lenders have to generate sufficient yields for market mortgage-backed securities (MBSs) to make them competitive in the total debt security market.
Housing Market Conditions
Trends and conditions in the housing market also affect mortgage rates. When fewer homes are built, or inventory is low, it can lead to a decline in the demand for mortgages and pressures interest rates downward. Another recent trend that can also drive rates downward is an increasing number of consumers opting to rent rather than buy a home.
How Mortgage Rates Impact House Prices
Mortgage rates don’t directly impact home prices, but they do influence housing supply—which plays a big role in pricing. As mortgage rates rise, existing homeowners are less likely to list their properties and enter the market. This creates a dearth of for-sale properties, driving demand up and prices with them. When rates are low, homeowners are more comfortable selling their properties. This sends inventory up and turns the market in the buyer’s favor—meaning more options and more negotiating power.
Is Refinancing A Good Option?
If you own a home, you may have already considered refinancing, especially as mortgage interest rates have continuously remained substantially low. But how do you know if refinancing your home is a good option for you? Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many reasons why homeowners refinance, such as:
- Obtaining a lower interest rate
- Shorten the term of their mortgage
- Convert from an adjustable-rate mortgage (ARM)
- To get a fixed-rate mortgage or vice versa;
- Tap into home equity to finance a large purchase, or to consolidate debt.
Since refinancing can cost between 3% and 6% of a loan’s principal and as with an original mortgage it requires an appraisal, title search, and application fees, it’s important for a homeowner to determine whether refinancing is a wise financial decision.
Do You Have Enough Home Equity To Refinance?
To help you further in determening whether refinancing your home is Here is a simple equation provided by discover.com that will help you determine your Loan-To-Ration and help you decide if refinancing is a good option for you.
What is Loan – To – Value- Ratio?
Your LTV is the ratio of how much you owe on your current mortgage loan divided by the current value of your home.
Why Is Your Loan-To-Value Ratio Important?
When deciding if you qualify for a mortgage refinance, the loan-to-value ratio (LTV) is an important metric used by lenders to determine your eligibility. Your LTV will not only help determine whether or not you qualify, it can also help a lender select your terms, APR and other aspects of your loan.
How to Determine What’s Your LTV !
If your home is valued at $100,000 and your current mortgage is $80,000, your LTV is $80,000 divided by $100,000, which equals 80%.
You may also calculate your equity, by subtracting the equity in your home from its total value, then divide that new number by your homes total value. This works because your homes current value is roughly equal to your mortgage plus your equity.
Common Refinance Programs
There are several different types of refinancing options. The type of loan a borrower decides on depends on the needs of the borrower.
The most common type of refinancing. This occurs when the original loan is paid and replaced with a new loan requiring lower interest payments.
The cash-in refinance allows the borrower to pay down some portion of the loan for a lower loan-to-value ratio or smaller loan payments.
A consolidation refinancing can be used when an investor obtains a single loan at a rate that is lower than their current average interest rate across several credit products. This type of refinancing requires the consumer or business to apply for a new loan at a lower rate and then pay off existing debt with the new loan, leaving their total outstanding principal with substantially lower interest rate payments.