Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, such as American Express, but our reports and recommendations are always independent and objective.
- Interest rates are an important factor when buying a mortgage, but you should consider the additional expenses before choosing the loan with the lowest rate.
- Many lenders require private mortgage insurance if you have less than 20% down, but lenders who are holding your loans may not charge you PMI.
- Ask for a detailed list of fees from different lenders, then compare apples to apples.
- When choosing between a fixed-rate and adjustable-rate mortgage, think about which one makes the most sense for your long-term goals.
- Policygenius can help you compare homeowners insurance policies to find the right coverage for you, at the right price »
Mortgage rates in the United States are at record lows right now, making it a potentially excellent time to buy a home. While there is no denying that interest rates are important, you may not want to choose a mortgage based only on the interest rate.
Kevin Parker, vice president of Field Mortgage at Navy Federal Credit Union, noted that APR is not the only cost you should consider when purchasing a mortgage lender. You should also think about private mortgage insurance, various rates and loan terms.
1. Consider a lender that does not require PMI
Private mortgage insurance (PMI) is a type of insurance that protects your lender if you stop making payments. Many lenders require PMI if your down payment is less than 20% of the home’s value.
According to the insurance comparison website Policygenius, the PMI can cost between 0.2% and 2% of the principal of your loan per year. If your mortgage is $ 200,000, you can pay an additional fee between $ 400 and $ 4,000 per year until you have paid 20% of the value of your home and no longer have to make PMI payments.
However, you are not necessarily doomed to pay PMI if you do not have a 20% down payment. Not all mortgage lenders require PMI for each type of loan.
Parker explained that the Navy Federal Credit Union does not require most borrowers to obtain PMI because the credit union has half of its loans.
“What that means is that we can sell some of our back-end loans to Fannie Mae, like many lenders, but we also have 50%,” Parker said. “That gives us more flexibility and allows us to be more creative in offering certain credit products.”
By finding a lender to make a loan portfolio, you can avoid paying PMI.
It’s still possible that a lower rate will save you more money in the long run than opting out of PMI. It depends on how much lower the rate is from one lender to another and how long you would make the PMI payments if you enroll. Take the time to figure out the numbers.
2. Request a detailed list of fees and compare charges between lenders
Parker said that if his own mother was buying a home, he would give her an important tip: “You want to make sure you can itemize each individual rate.”
“We are going to give you an estimate of the loan, which is the official document that basically details all the rates for that loan,” he continued.
When you receive loan estimates for your top lender options, you can compare rates from lender to lender.
Parker said he can usually request a closing cost estimate before officially submitting a request. The estimate will be generalized, because steps such as the appraisal of a home have not yet been carried out. But the estimate will still give you an idea of the fees the company charges.
Once you have chosen the home you want to buy and are ready to apply for a loan, the lender will do a thorough investigation of your credit report and provide you with a more detailed official loan estimate.
When you have loan estimates from multiple lenders, be it the closing cost estimate or the official estimate, you can compare the opening fees, appraisal fees, subscription fees, and anything else a lender may charge.
3. Choose a loan term that matches your financial goals
Parker suggested that borrowers consider their financial goals when choosing between a fixed-rate mortgage and an adjustable-rate mortgage, or ARM.
A fixed-rate mortgage locks your rate for the duration of your loan and generally comes with a term of 30 years, 20 years, or 15 years. Fixed-rate mortgages are safer bets than ARMs because their rates never change, and they can be a good option if you plan to stay in the house for a long time.
With an ARM, your rate stays the same for a few years, then changes after a specified period of time. For example, a 7/1 ARM locks your rate for the first seven years of your mortgage, and then changes once a year. Most lenders offer an ARM 7/1 and 5/1, and some have more term options.
ARMs are riskier than fixed-rate mortgages, because their rates increase or decrease along with market mortgage rates. However, ARM rates are generally lower than fixed-rate mortgage rates for the first few years, so if you plan to move soon, an ARM could be a better financial business.
Parker gave an ARM 3/1 as an example. “If they know they may not be on that property in three years, they may want to take advantage of a 3-year ARM, which gives them much better interest rates,” he said.