How to find the best rates and the best mortgage for you
When you are buying or refinancing a house, shopping for the best mortgage rate is an important part of the process. You want a good rate with good terms from a lender you trust. A great place to get started is to understand …
The difference between interest rate and annual percentage rate (APR)
Interest rate is the cost you will pay each year to borrow money expressed as a percentage rate. The interest rate does not reflect any fees or other charges you may have to pay for your mortgage.
An annual percentage rate (APR) is a broader measure of the total cost of the loan. APR is also expressed as a percentage rate. It includes interest charges as well as any loan fees, points, or mortgage insurance premiums you may have to pay. For that reason, annual percentage rate is typically higher than interest rate.
APR is a better way to compare different loan offers because it includes the costs associated with getting a mortgage from a lender in a single number. Let's take a look at two loan offers as an example.
In the chart below, Mortgage A and Mortgage B reflect offers from two different lenders. Both mortgages are for a house that costs $300,000 on which the buyer intends to make a 20% down payment. Both mortgages have a fixed rate and a 30 year term.
|Mortgage A||Mortgage B|
|Base Interest Rate||4.25%||4.50%|
|Pre-paid Finance Charges||$4,000||$1,000|
|Annual Percentage Rate (APR)||4.611%||4.536%|
At first glance, it might look like Mortgage A is less expensive than Mortgage B because the base interest rate is lower. However Mortgage A comes with higher fees and requires you to buy 2.5 discount points which are an up-front fee to pay down the interest rate. When all the costs associated with the two loan offers are included and these costs are calculated into an annual percentage rate, you see that the cost of Mortgage B is less than Mortgage A.
When you are comparing different mortgage offers it is important to understand all the terms and read the fine print including disclosures and assumptions related to the rates. You may find that a posted rate may only apply to customers with excellent credit scores, or there are limits on the loan size, or the rate is quoted only for a specific state or zip code. Freedom Mortgage loan specialists can help you understand more about interest rates and the options available to you based on your unique situation.
Fixed rate versus adjustable rate mortgages
Another important question for people who want to buy or refinance a house is whether they should choose a fixed rate or adjustable rate mortgage. A fixed-rate mortgage is a home loan where the interest rate stays the same throughout the life of the loan. Your monthly principal and interest payment won't change even if interest rates do.
An adjustable rate mortgage (or "ARM") is a type of mortgage in which the interest rate on the note varies throughout the life of the loan. The interest rate may be fixed for a period of time (i.e. introductory rate) after which the rate adjusts periodically based on an index. When your loan adjusts, monthly payments can go up or down, depending on current rates. Adjustable rate mortgages are also referred to as variable rate mortgages.
For example, one common type of adjustable rate mortgage is a "5/1 ARM" which has a fixed mortgage interest rate for the first five years of the loan. After this five year period is over, the interest rate will adjust each year. There are advantages and disadvantages to both fixed rate and adjustable rate mortgages. When you want to buy or refinance a home, consider both options and select the one that makes sense for you.
Different kinds of mortgages you can get
When you are shopping for a mortgage, you want to think about more than just the annual percentage rate. The type of mortgage you get is also important. Let's look at four options.
Conventional mortgages & jumbo loans
Conventional mortgages are what people often think of when they think of mortgages. A conventional loan is a type of loan which is not insured or guaranteed by the government. These loans are available to anyone who meets the lender's requirements. They can be used to purchase a primary residence as well as a second home. These loans may have stricter underwriting requirements then VA and FHA loans because they are given by lenders without any backing from the government.
Conventional mortgages that have loan limits are called "conforming loans" because they conform to the guidelines Fannie Mae and Freddie Mac set to buy mortgages from lenders. In 2019, the conforming loan limit is just over $484,000 for a single family home in most American communities. A jumbo loan is a mortgage for more than this conforming loan limit.
Federal Housing Administration (FHA) loans
FHA loans are designed to help people with moderate incomes buy homes. They are often popular choices for first time homebuyers because FHA loans give people the ability to buy a home with a smaller down payment and a less than perfect credit score. These loans feature competitive mortgage rates and are backed by the government.
You can only buy a primary residence with an FHA loan. There are limits on the size of the loan you can get. Borrowers will need to pay a monthly mortgage insurance premium with an FHA loan.
Veterans Administration (VA) loans
Veterans, active duty military personnel, and surviving spouses who qualify can buy a house with a VA loan. These loans do not have a down payment or minimum credit score requirement. These loans do not require monthly mortgage insurance and often have more competitive interest rates as compared to Conventional loans. VA loans are backed by the government and Freedom Mortgage is a top VA lender.
U.S. Department of Agriculture (USDA) loans
USDA loans help low-to-moderate income people purchase or refinance a home in suburban and rural communities. These loans are guaranteed by the U.S. Department of Agriculture and have similar benefits to FHA loans including competitive mortgage rates, lower down payments, and flexible credit score requirements.
Like FHA loans, USDA loans can only be used to purchase a primary residence up to a certain amount and borrowers are required to pay for mortgage insurance. Check out our comparison table:
|Conventional / Jumbo Loans||VA
|Down Payment Yes||Down Payment No||Down Payment Yes||Down Payment No|
|Mortgage Insurance Yes if less than 20% equity||Mortgage Insurance No||Mortgage Insurance Yes||Mortgage Insurance Yes|
|Credit Higher credit scores||Credit Lower credit scores||Credit Lower credit scores||Credit Lower credit scores|
|Type of Property No restrictions||Type of Property Primary residence||Type of Property Primary residence||Type of Property Primary residence|
|Government insured No||Government insured Yes||Government insured Yes||Government insured Yes|
Shopping around can help you find a better mortgage rate
It pays to shop around before you select a mortgage. A May 2018 article in Forbes1 found that "the average borrower could save $1,500 just by getting one extra rate quote when applying for their mortgage."
This is because lenders can offer consumers many different mortgage interest rates and terms. Mortgage lending is not a "one size fits all" business and lenders consider things like credit score, the amount of the down payment, the price of the home, the size of the loan, the term of the loan, and other factors when they make a decision. Lenders can also specialize in certain kinds of loans. At Freedom Mortgage, we serve all our customers and are honored to have the opportunity to serve our nation's Veterans and their families.
Shopping for a mortgage has other advantages. Home buyers who get pre-approved for a mortgage can get a better sense of how much they can afford to spend on a house. Getting pre-approved may make your bid on a house more competitive, because the sellers will have greater confidence your mortgage application will be approved and the sale will close. For more advice, check out our article on how to shop for a mortgage rate.
Freedom Mortgage loan specialists are happy to talk to you about mortgage rates and your mortgage loan options. If you want to buy or refinance a home, call us at 877-220-5533 or contact us online today.
- "Shopping Around For Your Mortgage Can Save You Big -- Here's How To Do It" by Aly J. Yale, published May 2, 2018 on Forbes.com.
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