Back HomeShop for a Mortgage as Rates Rise
It is always advisable to shop for a mortgage, but as rates rise the savings can be significant. Each lender offers different loan programs and sets different borrower requirements. It’s important that you get quotes from several types of financial institutions, mortgage lenders, and brokers to find one that offers the best loan program for you.
Banks
Banks are for-profit financial institutions that typically offer several different products such as mortgages, credit cards, checking and savings accounts, and more. Many large banks have branches nationwide or throughout a specific region where you can get in-person support, and they also might offer a wider selection of mortgage products.
One downside to banks is that they tend to charge slightly higher interest rates on home loans compared to credit unions, according to a side-by-side comparison by the National Credit Union Administration.
Credit Unions
Credit unions are nonprofit organizations that offer banking services to their members. In addition to offering lower interest rates on mortgages and other financial products, credit unions have historically earned the highest customer satisfaction ratings.
However, you’ll need to join a credit union to get a mortgage. Some credit unions are open to anyone, but others may require you to work in a certain industry or live in a certain area.
Mortgage Lenders
You might also find a home loan with another type of lender. For instance, online lenders, such as Rocket Mortgage, offer an end-to-end digital process. You may be able to get pre-approved, upload loan documents, and close on the loan all online. By saving money on overhead costs, online lenders may also be able to offer lower rates or special discounts.
Mortgage Brokers
Mortgage brokers are licensed to act as a go-between with you and your lender. When working with a mortgage broker, you’ll have access to a variety of residential loan programs from different lenders. The broker doesn’t make a loan. Instead, the broker has a variety of lenders they work with.
In general, a mortgage broker will have a lot of knowledge of different home loan programs, and a good idea of what you might qualify for, including what interest rate you’re eligible for.
Shop For Best Rates
Getting rate quotes from multiple lenders and comparing offers is one of the easiest ways to save money on your mortgage. That’s because the interest rate is one of the key components of the mortgage’s total cost, and rates can vary considerably with each lender. Despite this, about half of homebuyers skip shopping for the best rate.
To find the best loan for you, research all costs of the loan. Knowing just the amount of the monthly payment or the interest rate isn’t enough. Even more important than knowing the interest rate is knowing the APR — the total cost you pay for credit, as a yearly interest rate. The interest rate is a very big factor in calculating the APR, but the APR also includes costs like points and other credit costs, like mortgage insurance. Knowing the APR makes it easier to compare “apples to apples” when considering mortgage offers.
When you’re shopping around, you may see ads or get offers claiming to have rates that are very low or fixed. But they may not tell you the true terms of the deal as the law requires. The ad may feature buzz words that are signs that you’ll want to dig a little deeper.
- Low or fixed rate. A loan’s interest rate might be fixed or low only for a short introductory period — sometimes as short as 30 days. Then your rate and payment could increase dramatically. Look for the APR: under federal law if the interest rate is in the ad, the APR also should be there. Although it should be clearly stated, you may instead need to look for it buried in the fine print or deep within a website.
- Very low payment. This might seem like a good deal, but it could mean you would pay only the interest on the money you borrowed (called the principal). Eventually, though, you would have to pay the principal. That means you would have higher monthly payments or a “balloon” payment — a one-time payment that is usually much larger than your usual payment.
You also may find lenders that offer to let you make monthly payments where you pay only a portion of the interest you owe each month. The unpaid interest is added to the principal that you owe. That means your loan balance will increase over time. Instead of paying off your loan, you end up borrowing more. This is known as negative amortization. It can be risky because you can end up owing more on your home than what you could get if you sold it.
Find out your total payment. While the interest rate determines how much interest you owe each month, you also want to know what you must pay for your total mortgage payment each month. The calculation of your total monthly mortgage payment considers these factors, sometimes called PITI:
- principal (money you borrowed)
- interest (what you pay the lender to borrow the money)
- taxes and
- homeowners’ insurance
“Mortgage rates rose again as markets continue to manage the prospect of more aggressive monetary policy due to elevated inflation,” says Sam Khater, Freddie Mac’s chief economist. “Not only are mortgage rates rising but the dispersion of rates has increased, suggesting that borrowers can meaningfully benefit from shopping around for a better rate.”
Kim N. Bregman