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Best Mortgage Rates Of February 2019

How To Find The Best Mortgage Rates

Buying a home is exciting, but stressful. And making sure you’re getting the best deal is even more important.

In this article, I’ll show you how to find the best mortgage rates by better understanding rates themselves, the different types and durations of mortgages, and how and where to actually get your mortgage.

What is a mortgage rate?

A mortgage rate is expressed as a percentage and indicates how much you will pay in interest on a mortgage loan. Mortgage rates can be either fixed or variable (more on this below) and are decided by the mortgage loan lender.

The average mortgage rates will fluctuate based on the greater economic markets and general interest rate cycles, which can directly impact the market for home buying. Your individual mortgage rate is also determined by your credit score and overall borrower profile (i.e., income and existing debt).

What are the different kinds of mortgages?

Not all mortgages are the same, so to get the one that’s best suited for you, it’s essential to know what makes them all distinct. To keep this light, I’ll focus on two different kinds of mortgages:

  • Fixed-rate mortgages
  • Adjustable rate mortgages

While there are various types of mortgages within these two categories, deciding which of these two types best fits your needs is an excellent place to start.

Fixed-rate mortgages

A fixed rate mortgage is just what it sounds like—a mortgage that keeps the same exact rate for the life of the loan (which is typically 15 or 30 years).

So say you take out a 30-year fixed rate mortgage with a $1,500 monthly payment. You’ll make that same payment of interest and principal until you pay it off at 30 years (unless of course, you pay it off early).

Adjustable rate mortgages

Adjustable-rate mortgages (also called ARMs) on the other hand have interest rates that can change depending on different market conditions. This means that your monthly payment can go down or up.

The most common type of ARM taken out today is a fixed-period ARM. This is also known as a hybrid ARM. They’re based on a 30-year term and typically begin with a fixed rate for a specified period. This is usually five, seven, or sometimes even 10 years.

For instance, a five-year ARM is called a 5/1 ARM, and its interest rate will stay the same for the first five years. The monthly payment of interest and principal also remains the same during this time. But after the fifth year, the rate will be subject to change yearly for the outstanding 25 years left on the mortgage.

Your interest will change based on changes in the market, which means your monthly payments will vary depending on the applicable interest rate at the time of adjustment. So make sure you’re prepared to make more substantial monthly payments if interest rates go up.

Which type is best for me?

There are a bunch of things you need to think about before determining which loan type is best for you. First, do you need the predictability of knowing what your loan payments will be, year after year? If so, then a fixed-rate mortgage might be your best bet.

Next, think about if you’re planning to stay in your home for an extended period. If so, having more stability in your payment will be nice. If not, you may be able to take advantage of a lower rate and payment for the time you do live in the home with an ARM.

Finally, think about how vital security against rising interest rates in the future is. If you are optimistic they’ll decline in your favor, an ARM might be best. But if you prefer to have the security and not have to worry about it, a fixed-rate might be best.

For further reading, check out our article on the difference between a fixed rate mortgage and an adjustable rate mortgage.

What are mortgage points?

Mortgage points are essentially fees that you pay on a mortgage loan when the loan is distributed. One point is equal to 1% of the mortgage value. So, on a $250,000 mortgage, one point would equal $2,500.

Why would anybody pay mortgage points? Good question. In many cases, if a borrower has poor credit or lending is especially tight, a home buyer may have to pay points to be able to get any mortgage loan at all.

Often, however, mortgage lenders will offer the option of paying points in exchange for a lower interest rate on the mortgage. Sometimes, paying points can actually save a homebuyer money over the life of a mortgage. A reputable mortgage broker should be able to show you how a different points/interest rate combination might apply to your situation (whether you intend to live in your home for 50 years or sell in 5, for example). You can also get several competing mortgage quotes online pretty quickly, and use banks’ online quote tools to compare rates.

How long should you take out a mortgage for?

Buying a house is one of the most significant investments you’re going to make in your life, so it matters what kind of mortgage you get. The ideal situation is to be able to buy your home with cash, but most of us don’t have that kind of money just sitting around.

Because the 30-year loan is so much more popular, it can make a 10 or 15-year mortgage seem less appealing. But that’s not always the truth, and I’ll show you why.

First, here’s a quick pro and con list for your mortgage payment time:

 ProsCons
10-Year MortgageLower interest
Faster pay-off
Higher payment (significantly higher)
15-Year MortgageLower interest
Faster pay-off
Higher payment
30-Year MortgageLower payment
More money to invest
Long re-payment
Slow principal pay down

10 and 15-year mortgages

Let’s first look at 10 and 15-year mortgages and go over some of the pros and cons.

Lower interest rates

Banks will almost always give you a lower interest rate on a 10 or 15-year mortgage. A 15-year loan carries a smaller risk loan than a 30-year loan.

Think about it from a lender’s perspective. When the term is shorter, the chances of something negative happening become lower. Be it a job loss, major illness, or some other type of life event that can cause a substantial financial hit, the risk is lower when the amount to pay the money back is 10 or 15 years versus 30.

Faster pay down of the principal balance

The interest rates are usually about a 0.25 to 1.00 percent lower with a 15-year mortgage than a 30-year mortgage. This also means you can pay the loan off in a shorter amount of time. This becomes particularly helpful when you’re knocking the principal balance down faster.

Say, for instance, you borrow $300,000 as your mortgage loan. There’s going to be interest on top of that $300,000, so you have two parts to the mortgage—the principal and the interest.

With a 10 or 15-year loan, more of your monthly payment goes toward the principal balance, which means you’re paying off the mortgage faster than you would, say, a 30-year mortgage.

With a 30-year mortgage, at least in the early years, the majority of your monthly payment is going towards interest, not the principal balance.

Higher payment

Now that we’ve covered the two major upsides of a 10 or 15-year mortgage, I’ll share the biggest downside—having a higher payment every month. While you’re paying the principal balance down faster, there’s a major difference in the monthly payment on a $300,000 mortgage at 10 and 15 versus 30-years.

30-year mortgages

Now that we’ve covered some of the positives and negatives of a 10 or 15-year mortgage let’s get into some of the positives and negatives of a 30-year mortgage.

Lower payment

The most significant benefit of a 30-year loan is having a lower payment. This lower payment allows you to buy more home than you could initially afford with a 10 or 15-year mortgage. Again, this is because your payments are stretched out over 30 years.

More money to invest

Having a lower monthly mortgage payment frees up more cash for you to save or invest. Using elementary math, as long as the interest you’re earning on investments is higher than the interest rate on your mortgage, you’re creating a positive return.

So for example, if your interest rate on a 30-year mortgage is five percent and your investments are earning you six percent, that’s a difference of one percent each year over 30 years. It may sound meaningless, but over time it adds up.

Slow principal pay down

With a 30-year mortgage, the majority of your payments are going towards interest first, then the principal. So you’re not building a ton of equity in the process. At least not right away.

Longer time to pay off

The primary downside to a 30-year mortgage is that it takes longer to pay off. Depending on when you take the loan out, it could bleed into your retirement years. Most of us don’t want to be worrying about a sizable monthly obligation during our retirement years, I’ll tell you that.

Overall, you need to do what’s best for you. Yes, a 10 and 15-year mortgage makes more sense from a financial perspective, but not everyone can afford it. It also may not make sense if you’re in a job where you know you’ll be making more down the road (i.e., a physician) and you can refinance.

On the other hand, having extra money because you took out a 30-year loan requires discipline to put that money to work. What would you do with an additional $500? For example, would you save it or buy a new car?

Do what’s best for you, but make sure that you weigh out all the pros and cons for yourself first.

How to take out a mortgage

Now that you have a better idea on what a mortgage rate is and what some of the different mortgage types are, let’s dive into how you actually take out a mortgage. And more importantly, where you should look.

1. Focus on your credit score and debt levels

The first thing you need to do is make sure your credit score and overall credit profile are in check. Make sure you don’t have any negative marks on your credit report that don’t belong there. If your score is low and it’s legitimate, follow some of these ways to improve your score.

Also, make sure you’ve reduced your debt as much as possible. You’ll want to focus on your debt-to-income ratio, which shows how much debt you have versus what your annual income is. The level of debt-to-income allowed varies by lender, but I would shoot for under 30 percent.

2. Think about the type of mortgage you want and the down payment required

If you’re going for a traditional, 30-year loan, you may be able to put as little as three percent down (though I don’t recommend it). Different loans require different down payments, and each loan type will come with a different cost (as I explained above).

Think about how much you have, or will have, for a down payment without making yourself completely broke. After that, weigh the pros and cons of the mortgage types you have available and choose the best option for YOU.

3. Get pre-approved once you’re ready

You can get pre-qualified, but that only takes you so far. A pre-approval comes once you’re ready to make an offer on a home and is much more involved than a pre-qualification. A pre-approval will look at your credit score and debt levels and be a hard pull on your credit—impacting your score. But it is a more accurate evaluation of if, and how much, a home you can buy.

There are plenty of places you can get prequalified, so I’ll cover your main options.

A credit union

Going to a local credit union can be an excellent place to get a mortgage loan. I personally got a mortgage from a local credit union for my first two homes, and I loved it. Not only did they provide competitive rates, but because they were a small, community-owned operation, I knew who I was dealing with.

I knew the person who originated my loan, serviced my loan, and it was easy to call them up to get documents I needed. I also knew they’d never sell my loan to another lender, which banks often do.

On the downside, my credit union was less than technologically-advanced. Their website was terrible, the online payment system was a nightmare, and their iPhone app was a joke. So if you need those types of things, I wouldn’t expect them from a local credit union.

Online

Currently, going online is one of the best ways you can get pre-approved for a mortgage. Aside from the simplicity, you have more options at your fingertips. One of our favorites is LendingTree.

LendingTree is a fast and easy way to get pre-approved for your mortgage from a variety of different lenders. All you have to do is fill out some basic information, and LendingTree will present you with a series of pre-qualified offers. From there, you choose the offer that best suits you and move forward to buying your first home.

One of the other things I love about LendingTree is that you can explore a bit. For example, if you’re not looking to a buy a home right now but you want to see what you’d qualify for, LendingTree can do that for you. It’s really a great service.

The downsides to borrowing online are that you won’t get a person face-to-face, and your rate might be slightly higher due to the convenience of online lending.

Big banks

This is my least favorite option, but it’s what many people still choose to do. You can look at the likes of Chase and PNC or any other major bank in your area and can go through the pre-qualification process. The major upsides are that you’ll get access to the latest and greatest in technology—all of the major banks have great websites and apps. You’ll also get the best features—these large banks have more money to invest in things like the bells and whistles on apps.

The downsides are that you may not get as much face time or personal attention as you would with a smaller bank or credit union. You also run the risk of your loan being sold to another lender, which causes confusion and disruption if it’s not communicated clearly (which has happened to many friends of mine).

4. Make an offer and close on your home

Wow, that sounds simple, doesn’t it? The home closing process is actually one of the most stressful and tedious parts of the whole process. After finding a home and making an offer, you’ll have to do an official application (once the offer is accepted).

From there, they’ll finalize the loan amount and move through the closing process, which includes things like a home inspection and appraisal. This can take months in some cases so be ready.

Remember to factor in your closing costs – these include everything else it takes to write a mortgage. Closing costs include home appraisals, credit check fees, title insurance, title transfer fees, underwriting fees, escrow charges, and others. It’s important to check with potential lenders and get a good-faith estimate of closing costs so you don’t get blindsided by fees you didn’t expect.

Summary

When it comes to buying a house, either now or down the road, it’s essential that you know details of getting the best type of mortgage and the best mortgage rate. You also need to have your financial situation figured out, before getting started. My advice is to

  1. Draw up a strict budget
  2. Review average market interest rates
  3. Use our mortgage calculator to review the numbers, and most importantly,
  4. Make sure you’re real with yourself regarding how much home you can really afford

When you buy a house, you’re not only setting out the welcome mat for a happy home, but you’re making a financial commitment for many years to come

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About Chris Muller

Chris Muller is the founder of Money Mozart, where he blogs about personal finance, frugality, and living below your means. He's currently on the pursuit of early retirement while trying to figure out how to be a dad for the first time. You can connect with Chris on Twitter, Pinterest, and Google+.

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  2. Pat says:

    I am looking to take out a mortgage on a property that is rental and currently paid off.
    I do have long term renters paying good rent. I want to get money to refurbish the property
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    Where do I look to find the right company? I have another rental property that I have a loan on
    with B of A. for 10 years.

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