Mortgage Rate Shopping: 10 Tips to Get a Better Deal

Last updated on December 8th, 2020

Looking for the best mortgage rates? We’ve all heard about the super-low mortgage rates available, but how do you actually get your hands on them?

When it’s all said and done, it never seems to be as low as the bank originally claimed, which can be pretty frustrating or even problematic for your loan closing.

But instead of worrying, let’s try to find solutions so you too can take advantage of these remarkable interest rates.

There are a number of ways to find the best mortgage rates, though a little bit of legwork on your behalf is definitely required.

After all, you’re not buying a TV, you’re buying a home or refinancing an existing, probably large home loan.

best mortgage rate

If you’re not willing to put in the work, you might be disappointed with the rate you receive. But if you are up for the challenge, the savings can make the relatively little time you put in well worth it.

The biggest takeaway is shopping around, since you can’t really determine if a mortgage rate is any good without comparing it to others.

Many prospective and existing homeowners simply gather one quote, typically from a friend or real estate agent’s reference, and then kick themselves later for not seeing what else is out there.

Below are 10 tips aimed at helping you better navigate the shopping experience and ideally save some money.

1. Advertised mortgage rates generally include points and are best-case scenario

You know those mortgage rates you see on TV, hear about on the radio, or see online. Well, most of the time they require you to pay mortgage points.

So if your loan amount is $200,000, and the rate is 3.75% with 1 point, you have to pay $2,000 to get that rate. And there may also be additional lender fees on top of that.

It’s important to understand that you’re not always comparing apples to apples if you look at interest rate alone.

For example, lenders don’t charge the same amount of fees, so clearly rate isn’t the only thing you should look at when shopping.

Additionally, these advertised mortgage rates are typically best-case scenario, meaning they expect you to have a 760+ credit score and a 20% down payment. They also expect the property to be a single-family home that will be your primary residence.

If any of the above are not true, you can expect a much higher mortgage rate than advertised.

Are you showing the lender you deserve the lowest rate, or simply demanding it because you feel entitled to it? Those who actually present the least risk to lenders are the ones with the best chance of securing a great rate.

2. The lowest mortgage rate may not be the best

Most home loan shoppers are probably looking for the lowest interest rate, but at what cost? As noted above, the lowest interest rate may have steep fees and/or require discount points, which will push the APR higher and make the effective rate less desirable.

Be sure you know exactly what is being charged for the rate provided to accurately determine if it’s a good deal. And consider the APR vs. interest rate to accurately gauge the cost of the loan over the full loan term.

Lenders are required to display the APR next to the interest rate so you know how much the rate actually costs. Of course, APR has its limitations, but it’s yet another tool at your disposal to take note of.

3. Compare the costs of the rate offered

Along those same lines, you need to compare the costs of securing the loan at the par rate, versus paying to buy down the rate.

For example, it may be in your best interest to take a slightly higher rate to cover all your closing costs, especially if you’re cash-poor or simply don’t plan on staying in the home very long.

If you won’t be keeping the mortgage for more than a year or two, why pay points and a bunch of closing costs out of pocket. Might as well take a slightly higher rate and pay a tiny bit more each month, then you can get rid of the loan. [See: No cost refinance]

Conversely, if you plan to hunker down in your forever home and can obtain a really low rate, it might make sense to pay the fees out-of-pocket and pay points to lower your rate even more. After all, you’ll enjoy a lower monthly payment as a result for many years to come.

4. Compare different loan types

When comparing pricing, you should also look at different loan types, such as a 30-year vs. 15-year. If it’s a small loan amount, you might be able to refinance to a lower rate and barely raise your monthly payment.

For example, if you’re currently in a 30-year home loan at 6%, dropping the rate to 2.75% on a 15-year fixed won’t bump your mortgage payment up a whole lot. And you’ll save a ton in interest and own the home much sooner, assuming that’s your goal.

And as mentioned, if you only plan to stay in the home for a few years, you can look at lower-rate options, such as the 5/1 ARM, which come with rates that can be much lower than the 30-year fixed. If you’ll be out of there before the loan ever adjusts, why pay for the 30-year fixed?

5. Watch out for bad recommendations

However, don’t overextend yourself just because the bank or broker says you’ll be able to pay off your mortgage in no time at all.

They may recommend something that isn’t really ideal for your situation, so do your research before shopping. You should have a good idea as to what loan program will work best for you, instead of blindly following the loan officer’s opinion.

It’s not uncommon to be pitched an adjustable-rate mortgage when you’re looking for a fixed loan, simply because the ultra-low rate and payment will sound enticing. Or told the 30-year fixed is a no-brainer, even though you plan to move in just a few years.

6. Consider banks, online lenders, credit unions, and brokers

I always recommend that you shop around and compare lenders as much as possible. This means comparing mortgage rates online, calling your local bank, a credit union, and contacting a handful of mortgage brokers.

If you stop at just one or two quotes, you may miss out on a much better opportunity. Put simply, don’t spend more time shopping for your new couch or stainless-steel refrigerator. This is a way bigger deal and deserves a lot more time and energy on your part.

Your mortgage term is probably going to be 30 years, so the decision you make today can affect your wallet for the next 360 months, assuming you hold your loan to term. Even if you don’t, it can affect you for years to come!

7. Research the mortgage companies

Shopping around will require doing some homework about the mortgage companies in question. When comparing their interest rates, also do research about the companies to ensure you’re dealing with a legitimate, reliable lender that can actually get your loan closed.

A low rate is great, but only if it actually funds! There are lenders that consistently get it done, and others that will give you the runaround or bait and switch you, or just fail to make it to the closing table because they don’t know what they’re doing.

Fortunately, there are plenty of readily accessible reviews online that should make this process pretty simple. Just note that results will vary from loan to loan, as no two mortgage loans or borrowers are the same.

You can probably take more chances with a refinance, but if it’s a purchase, you’ll want to ensure you’re working with someone who can close your loan in a timely manner. Otherwise a seemingly good deal could turn bad instantly.

8. Mind your credit scores

Understand that shopping around may require multiple credit pulls. This shouldn’t hurt your credit so long as you shop within a certain period of time. In other words, it’s okay to apply more than once, especially if it leads to a lower mortgage rate.

More importantly, do not apply for any other types of loans before or while shopping for a mortgage. The last thing you’d want is for a meaningless credit card application to take you out of the running completely.

Additionally, don’t go swiping your credit card and racking up lots of debt, as that too can sink your credit score in a hurry. It’s best to just pay cash for things and keep your credit cards untouched before, during, and up until the loan funds.

Without question, your credit score can move your mortgage rate significantly (in both directions), and it’s one of the few things you can actually fully control, so keep a close eye on it. I’d say it’s the most important factor and shouldn’t be taken lightly.

If your credit scores aren’t very good, you might want to work on them for a bit before you apply for a mortgage. It could mean the difference between a bad rate and a good rate, and hundreds or even thousands of dollars.

9. Lock your rate

This is a biggie. Just because you found a good mortgage rate, or were quoted a great rate, doesn’t mean it’s yours.

You still need to lock the rate (if you’re happy with it) and get the confirmation in writing. Without the lock, it’s merely a quote and nothing more. That means it’s subject to change.

The loan also needs to fund. So if you’re dealing with an unreliable lender who promises a low rate, but can’t actually deliver and close the loan, the rate means absolutely nothing.

Again, watch out for the bait and switch where you’re told one thing and offered something entirely different when it comes time to lock.

Either way, know that you can negotiate during the process.  Don’t be afraid to ask for a lower rate if you think you can do better; there’s always room to negotiate mortgage rates!

10. Be patient

Lastly, take your time. This isn’t a decision that should be taken lightly, so do your homework and consult with family, friends, co-workers, and whoever else may have your best interests in mind.

If a company is aggressively asking for your sensitive information, or trying to run your credit report right out of the gate, tell them you’re just looking for a ballpark quote. Don’t ever feel obligated to work with someone, especially if they’re pushy.

You should feel comfortable with the bank or broker in question, and if you don’t, feel free to move on until you find the right fit. Trust your gut.

Also keep an eye on mortgage rates over time so you have a better idea of when to lock. No one knows what the future holds, but if you’re actively engaged, you’ll have a leg up on the competition.

One thing I can say is, on average, mortgage rates tend to be lowest in December, all else being equal.

In summary, be sure to look beyond the mortgage rate itself – while your goal will be to secure the lowest rate possible, you have to factor in the closing costs, your plans with the property/mortgage, and the lender’s ability to close your loan successfully.

Tip: Even if you get it wrong the first time around, you can always look into refinancing your mortgage to lower your current interest rate. You aren’t stuck if you can qualify for another mortgage down the road!


Pros and Cons of Refinancing Your Mortgage Right Now

Since April 1, 2009, roughly 16.2 million American homeowners have refinanced their mortgages, according to the latest Housing Scorecard released by HUD.

But as you may or may not know, there are still millions of homeowners who have not, for one reason or another.

Some may not be eligible, while others may be going through foreclosure or have simply given up on making payments.

[Reasons why you can’t refinance.]

And hey, some just may have procrastinated, or simply aren’t that interested in their mortgage.

For example, Obama hasn’t refinanced his mortgage in seven years, but Bernanke has been all about it in recent years.

If you look at the chart below, you’ll notice that refinancing has been pretty steady since the lull in 2008 (when lending came to a standstill), but it’s still nowhere close to that seen in 2003 when things were bubbling up toward implosion.


Yet, mortgage rates are at all time lows, and continue to fall seemingly every week, month, etc., not that anyone seems to care.

So if you’re on the fence about refinancing, let’s look at a few pros and cons of refinancing now vs. later.

Con: Home Prices Rising

Home prices have been on the rise for a while now, and are expected to keep climbing nationwide.

The Housing Scorecard also noted that rising property values have brought homeowner equity to its highest point since the third quarter of 2008.

That pushed 1.3 million homeowners out of an underwater position. That’s great for those looking to refinance, as it should make it easier.


But higher home prices also make refinancing even more attractive to those with equity because their loan-to-value ratio may fall to a lower threshold, pushing their qualifying mortgage rate even lower.

So for those who believe their home value will keep increasing, pumping the brakes on refinancing might be a good move, especially if you’re right on the cusp of a LTV threshold such as 80%, where you can ditch mortgage insurance.

Pro: Record Low Rates

On the flip side of that argument, one could argue that mortgage rates are at unprecedented levels, and you’d be a fool not to refinance now.

After all, what if mortgage rates tick higher and you “miss your chance” at snagging a 30-year fixed near 3%?

You might kick yourself a few times for missing the boat. And how low can mortgage rates really fall?

Con: Even Lower Rates

Well, the housing pundits have said that month after month, and week after week, only to grab their erasers and pretend they didn’t call a mortgage rate bottom.

I’ll admit that I’ve been one of those people.

Yes, rates are absurdly low, but no, they probably haven’t bottomed. There is still so much uncertainty out there that can push rates even lower.

Europe is still unraveling, and whether there has been much improvement locally is still a big question mark.

With the Fed pledging to buy mortgage securities until the cows come home, waiting could pay off.

Pro: Lower Payments Today

But, the longer you wait to refinance, the more you’ll pay each month in the form of a higher interest rate.

So if you keep riding it out, waiting for that perfect time to refinance, you’re essentially missing out on a lower payment during those months (or years).

Make sure you factor in all that money once you finally make the decision to refinance. The savings could be skewed as a result.

Con: Big Picture Savings

Of course, you might just say, “hey, I might be spending more each month now, but once I get a 2.50% 30-year fixed, I’ll be ahead in no time.”

That could be true, and someone who waits a bit longer could wind up with an even better rate and a lower monthly payment, which could spell bigger savings over the years ahead.

[Locking vs. floating]

After all, refinancing costs money (unless it’s a no cost loan), and serially refinancing isn’t always possible (nor fun), especially if your credit takes a hit or something else makes you ineligible.

Pro: You’re Eligible Now

Speaking of, if you’re eligible now, and the interest rate is dynamite, letting it ride might not be the best move.

What if something does bar your eligibility, such as unemployment, a mindless missed payment that leads to a lower credit score, or simple program changes?

There’s been talk about all types of stuff on the horizon, like a qualified mortgage, which Romney mentioned in the first presidential debate.

You wouldn’t want to be caught out by a future change or misstep, would you?

In summary, you can’t really go wrong by refinancing right now, assuming it saves you money, but yes, waiting could prove to be better.

In any case, take the time to really think it over!


The Problem With Mortgage Rate Surveys

Every week, mortgage financier Freddie Mac comes out with a mortgage rate survey, which reveals the average interest rate (and points) charged by lenders for popular types of home loans.

About 125 lenders from across the nation, including thrifts, mortgage lenders, credit unions and commercial banks, take part in the survey that dates back to 1971.

The survey data is collected from Monday to Wednesday, and the results are posted on Freddie Mac’s website on Thursday of each week.

Come Thursday morning, the media goes nuts with the data in the report, known as the Primary Mortgage Market Survey (PMMS).

And just minutes after its release, you’ll see startling headlines like, “mortgage rates fall again,” or “mortgage rates climb higher.”

Mortgage Rate Surveys Use Old Data

  • The biggest flaw with the survey is that the rates are delayed
  • Because mortgage rates aren’t static
  • They are constantly in flux, both daily and intraday changes can take place
  • So you’re really just getting yesterday’s news at best

Unfortunately, whatever the message may be for a given week, it’s often old news by the time the media gets their grubby hands on it.

You see, mortgage rates can and will change daily, and sometimes swing dramatically, depending on what’s going on that week.

Lately, there have been plenty of swings thanks to all the uncertainty regarding the direction of the economy.

So a mortgage rate quote (yes, they’re just quotes in the survey) given to a handful of borrowers on Monday may be completely different by Thursday.

Sure, it could be exactly the same too, but chances are it won’t be. And the direction of rates often highlighted in news reports may be completely wrong as well.

Imagine opening up a newspaper on Thursday morning and viewing stock quotes from a few days earlier. That wouldn’t do you much good, would it? Especially if you had to act on it.

Assumptions Aplenty

  • Like all other rates you see advertised or surveyed
  • They make a series of assumptions
  • Such as a 20% down payment or a 740 credit score
  • Which may or may not actually apply to you

Okay, so the data isn’t as timely as the media might make it appear, even if it’s “weighted” and “averaged” and “algorithmically adjusted.”

Yes, I’m making up phrases here, but the point is the data is only as good as the day it is released, at least for the purposes of a prospective borrower shopping rates.

On top of that, the rates in the survey assume the world of you, the borrower.

The rates are based on first-lien (first mortgage) prime (great credit) conventional (non-government) conforming mortgages (small loan amounts) with a loan-to-value ratio of 80% (big down payment).

In other words, if you’re not putting down 20%, the rate in the survey isn’t for you. And if your credit score isn’t tip-top, you should also ignore the rates in the survey unless you want to be disappointed.

If you’ve got a jumbo loan, again, don’t bother reading the survey if you’re curious what rate you’ll actually receive.

Are the Mortgage Rate Surveys a Waste of Time?

  • Averages and old data don’t sound very useful
  • But the weekly mortgage rate surveys do have some value
  • In measuring interest rates over time for research and perspective
  • However for rate shopping they’re probably not all that helpful

I know I sound overly negative about the survey, but back in the day, I used to report on it just like every other major media outlet.

I stopped after I realized it wasn’t adding much value, not to mention the fact that 1000 other news outlets wrote about the very same stuff every Thursday morning.

The surveys aren’t inherently bad, they’re just not a very effective tool for borrowers shopping rates. If anything, they’re good to measure interest rates over time.

And a researcher may use the data to explain something that happened in the past, or to attempt to predict something that may happen in the future.

But for mortgage rate shopping, the Freddie survey (or any of the many, many other surveys out there) won’t do you much good. If anything, it could just frustrate you (and your loan officer) when the numbers don’t match up.

Zillow launched a weekly mortgage rate update a while back that is released every Tuesday.

They actually note that theirs isn’t a survey and the rates aren’t “marketing rates,” but rather are based on custom mortgage rate quotes submitted daily, reflecting the most recent market changes.

Again, take them with a grain of salt because there is no one-size-fits-all in mortgage lending.

So if you want the real skinny, get daily mortgage pricing from the bank or lender you’re working with.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.


A Long Mortgage Process Can Be Your Friend or Your Worst Enemy

Posted on August 17th, 2012

Let’s face it, these days it takes a while to get a mortgage. And by a while, I mean months in some cases.

Why? Because everyone and their mother is well aware of the record low mortgage rates, and they all want a bite.

As a result, both purchase and refinance transactions are averaging 48 days to close as banks and lenders merely try to keep up with demand.

This means once you submit your loan application, it will take an entire month and a half to actually close the deal, if you’re lucky.

Obviously this is more important for purchase transactions, as they are more time-sensitive, but timing is very important when it comes to refinancing as well.

Mortgage Rates Subject to Change

When you see a certain mortgage rate advertised online or on TV, you must take it with a large grain of salt.

First off, it’s a perfect-scenario rate for someone that meets certain requirements, such as having a great credit score, a large down payment (or low LTV ratio), and a loan amount below the conforming limit.

Assuming you meet all those requirements (and more), that rate may still be out of reach for one reason or another, one being time. In short, a rate you see today may not be available tomorrow.

That brings us back to that 48 days to close situation. Per the latest Origination Insight Report from Ellie Mae, refis averaged 48 days to close in July, while purchases averaged 47 days.

These numbers have been inflated for the entire year now, and loan originators are swamped trying to get all those applications funded. While they’re working to fund your loan, don’t expect mortgage rates to stand still. Instead, expect a roller coaster ride at best.

Who’s Hurting?

Well, in the past couple weeks mortgage rates have been trending up after touching all-time lows.

As a result, those who submitted loan applications a month or so ago may be in for a rude awakening.

For example, they may have submitted their loan when the 30-year fixed was averaging close to 3.5%, only to find rates have climbed to 3.75% today.

If it’s almost time to close, they’ll have no choice but to take the higher rate (or buy down their rate). A higher rate could also jeopardize their approval if it swings their DTI ratio too high.

Clearly this isn’t ideal, but this is why savvy borrowers lock their rate instead of floating it when rates are attractive.

So those who got greedy or simply didn’t think to lock might be bummed out.

Is Now the Time to Wait?

Because mortgage rates have been climbing steadily on what appears to be no news, we’re probably due for a correction sometime soon.

After all, the economy hasn’t exactly proven itself, and Europe isn’t out of the woods. It seems their latest move is to just keep quiet and hope no one notices what’s really going on.

It certainly seems to be cyclical, with bad news and good (or no news) coming in and out, pushing mortgage rates up and down.

At the moment, we’re in an uptrend, so those who just submitted loans may want to wait it out until things improve again. Heck, you’ve got more than a month to decide.

Sure, you run the risk of mortgage rates climbing even higher by the time you close your loan, but with no great news out there, there’s a good chance rates could trend back down to where they were a month ago.

All that said, make sure you consider timing when submitting your loan. Ask your bank or broker how long it will take to close, and plan accordingly to ensure you get the rate you want.

For the record, the closing rate has been pretty dismal of late. Only 37.9% of refis and 58.7% of purchases actually closed(within 90 days), meaning plenty of loans are getting denied for one reason or another.

Read more: Reasons why your refinance was denied.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.


Is There Any Correlation Between Elections and Mortgage Rates?

Last updated on April 27th, 2018

Seeing that it’s Election Day, I figured I’d take a look at historic mortgage rates to see if there is any correlation between their direction and elections.

Specifically, I wanted to see if there was any significant movement after an election took place, as a new Republican or Democrat (or Roseanne) could potentially sway the direction of the economy.

At least, that’s what the aggressive pundits out there always seem to bark in November.

For my little project, I relied upon archives of the Primary Mortgage Market Survey from Freddie Mac, which stretch back to 1971.

Let’s Run the Numbers

  • I wanted to find out if mortgage rates are impacted by presidential elections
  • So I looked at 30-year fixed rates in November versus December
  • During an election year since 1972
  • The results were interesting…

The very first presidential election since that time came on November 7, 1972, when Richard Nixon pummeled George McGovern in a landslide victory.

During the month of November in 1972, the 30-year fixed averaged 7.43%. It increased to 7.44% in December, and stayed put through March. Not much movement at all.

In the 1976 election, Carter defeated Ford, and the 30-year fixed stood at 8.81%. It dropped to 8.79% a month later, and was pretty much unchanged for an entire year afterwards.

In 1980, Reagan took office after crushing Carter, and the 30-year fixed averaged 14.21%. It increased to 14.79% a month later, and to 18.45% nearly a year later. But that was more to do with staggering inflation than anything else.

Four years later, Reagan won again, and the 30-year fixed was a slightly improved 13.64%. In December, it dipped down to 13.18%, and improved dramatically over the next year as the economy got back on track.

In 1988, George H.W. Bush came to power, and the 30-year was a much more reasonable 10.27%. It rose to 10.61% a month later, and didn’t do a whole lot after that.

Bush lost to Clinton in 1992, and mortgage rates on the 30-year fixed were a relatively low 8.31%. They fell to 8.21% in December, and dipped into the six-percent range a year later.

Clinton stayed in office in the 1996 presidential election, and the 30-year fixed averaged 7.62%. It barely budged to 7.60% a month later, nor did it move much the following year.

When George W. Bush won in 2000, the 30-year fixed averaged 7.75%, and actually fell a decent amount to 7.38% in December. Still, nothing noteworthy.

Bush won again in 2004 when the 30-year fixed averaged 5.73%. It inched up to 5.75% in December, and did little the following year.

In 2008, Barack Obama defeated McCain, and the 30-year fixed stood at 6.09%. It tanked to 5.29% in December, but only because the economy was in tatters, unemployment was surging, and the Fed had announced a plan to buy mortgage-backed securities.

In 2012, Obama won again and mortgage rates literally didn’t move.

The latest presidential election in 2016 resulted in victory for Donald J. Trump over Hillary Rodham Clinton. Interestingly, mortgage rates jumped 0.43%, which is more than 11% higher in a month’s time.

What Trends Popped Out?

  • There’s no clear direction either way
  • We’ve seen rates go up, down, and sideways
  • Though there have been some big moves in recent years
  • The one trend is rates have never gone up after a Democrat won

There’s no clear direction in rates from November to December in an election year. Rates have moved up, down, or in the case of the 2012 election, remained completely unchanged.

So it looks as if the election itself doesn’t have much impact on mortgage rates, even though some frenzied loan officers will urge you to lock or float depending on who’s projected to win.

The only small takeaway, if you can even call it that, is mortgage rates have fallen month-over-month after a Democrat has been elected since 1976, other than being flat in 2012. It’s a mixed bag for Republicans.

More importantly, it’s the state of the economy that matters, and we all know that won’t change overnight, no matter who wins.

[What mortgage rate can I expect?]

30-year fixed average from November to December in election year:

2016 – November 8, 2016 (Donald J. Trump) 3.77% – up to 4.20%
2012 – November 6, 2012 (Barack Obama) 3.35% – unchanged
2008 – November 4, 2008 (Barack Obama) 6.09% – down to 5.29%
2004 – November 2, 2004 (George W. Bush) 5.73% – up to 5.75%
2000 – November 7, 2000 (George W. Bush) 7.75% – down to 7.38%
1996 – November 5, 1996 (Clinton) 7.62% – down to 7.60%
1992 – November 3, 1992 (Clinton) 8.31% – down to 8.21%
1988 – November 8, 1988 (George H.W. Bush) 10.27% – up to 10.61%
1984 – November 6, 1984 (Reagan) 13.64% – down to 13.18%
1980 – November 4, 1980 (Reagan) 14.21% – up to 14.79%
1976 – November 2, 1976 (Carter) 8.81% – down to 8.79%
1972 – November 7, 1972 (Nixon) 7.43% – up to 7.44%

Also see: Mortgage rates vs. presidential inaugurations


Making the Argument for an Adjustable-Rate Mortgage

Last updated on February 2nd, 2018

It’s no secret that fixed-rate mortgages have dominated the mortgage market in recent years, mainly because they’re just so darn cheap.

They’ve been breaking records left and right thanks to the bleak economic outlook and the Fed’s continued buying of mortgage-backed securities.

But they aren’t the only types of home loans benefiting – unfashionable adjustable-rate mortgages are also super cheap, even those that feature a fixed portion for several years.

Initial Rates on ARMs Lowest in History


In fact, initial-period rates on ARMs are the lowest in Freddie Mac’s Annual Adjustable-Rate Mortgage (ARM) Survey, which is now in its 29th year.

By initial-period rate, Freddie means the teaser rates that mortgage lenders offer to borrowers for taking an ARM as opposed to a safer, more secure fixed mortgage.

You see, most ARMs are hybrids, meaning they’re fixed for some period of time before becoming adjustable for the rest of the loan term.

They’re all tied to some mortgage index, whether it’s the LIBOR or the MTA, the latter being the Monthly Treasury Average, which covers 69% of ARMs nowadays.

The most common adjustable home loan is the 5/1 ARM, which is fixed for the first five years and annually adjustable for the remaining 25 years.

In early January, it averaged 2.75%, a 0.65% discount relative to the almighty 30-year fixed, which stood at 3.40%.

For a borrower with a $250,000 loan amount, the 5/1 ARM would result in monthly savings of nearly $90.

[Fixed Mortgage vs. ARM]

Of course, it would only offer such savings for the first 60 months, after which anything goes! Well, within the mortgage caps that limit how much ARMs can move…

But still, that $90 over five years would result in more than $5,000 in mortgage payment savings, which is surely nothing to scoff at.

Assuming the 5/1 ARM presented too much risk, a borrower could go with a 7/1 ARM, which is fixed for an entire seven years.

The initial rate on the 7/1 averaged 2.97% in January, which was still nearly a half a percentage point below the 30-year fixed.

It would provide even more breathing room for the borrower willing to “take a chance,” especially seeing that most homeowners move, refinance, or prepay around the 7-year mark.

Or if seven years isn’t enough, there’s always the 10/1 ARM, which as the name implies, is fixed for an entire decade before going rogue (adjustable).

The 10-year stood at 3.29% earlier this month, which was only an 11 basis point discount to the 3.40% average on the 30-year fixed.

Probably doesn’t make a whole lot of sense given the fact that you could still be in your home/mortgage after 10 years.

In any case, the initial rates on these two types of ARMs decreased by 0.32 and 0.57 percentage points, respectively, compared to last year.

Finding the Sweet Spot

If you really want to take a chance in this low mortgage rate environment and snub the 30-year fixed, you’ve got to do some homework to determine how long you’ll need the protection of the fixed-rate period.

Assuming five years is ample time to “flip” your property and move on, it could make sense to take a chance (Facebook founder Zuckerberg has an ARM).

But if you need more, the 7/1 ARM might be a good candidate as well. The 10/1 is so close to the 30-year that you’re kind of splitting hairs, and you probably don’t want to sit in bed every night counting down the days.

After all, time can fly when you don’t want it to…

For the record, there are also even shorter ARMs, such as the 3/1 and the one-year adjustable, which clearly don’t stay fixed for long. And seeing that their initial discounts aren’t too hot, they also don’t make much sense.

At the moment, ARMs are cheap, but there’s a reason I referred to them as “bad news” not too long ago.

They aren’t for the faint of heart, and with so much uncertainty ahead, the comfort of a very low fixed loan may just be worth the minimal extra cost.

During 2012, ARMs accounted for one-in-ten new purchase mortgages, per FHFA data. Freddie sees them grabbing a 12% market share in 2013.

(photo: Elvert Barnes)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.


Watch the Holiday Spending If You Plan to Refinance

Well, believe it or not, the holidays are upon us again. It seems like just yesterday I was cursing the fact that I didn’t have an air conditioner, and now I wish I had a better heater. Go figure.

To compound that, I now need to get out (or stay online) and do my holiday shopping. The good news is that family and friends have to do the same thing for me, assuming they actually bother buying me gifts this year.

Anyway, I got to thinking about a possible problem that can arise from aggressive holiday shopping.

If you spend and spend and spend in the next few weeks, make sure you can actually pay for all your purchases.

Otherwise you’ll rack up credit card debt, which can obviously lead to costly finance charges.

Unintended Consequences

We all know credit card debt is bad; after all, the APR on credit cards is sky-high compared to pretty much every other type of loan, especially mortgages.

So you’ll be wasting away money via outrageous finance charges if you don’t pay off your bad gift giving debt.

But worse are the unintended consequences of carrying said debt.

Let’s assume you’ve got a “great plan” to tidy up your finances and finally get around to that refinance once the in-laws are forcibly removed from your home after the holidays.

Come January, you apply for a refinance at your local bank or via an online lender, with grand plans to save tons of money via an über-low mortgage rate.

You know you’ve got a good credit score, a well paying job, and plenty of assets. Heck, you’ve even got a fair amount of home equity, which will make your low-LTV loan bulletproof.

As you’re daydreaming about your stellar borrower profile, the phone rings, and it’s your loan officer.

Remember your awesome credit score? Well, it dropped 30 points, thanks to all that new credit card debt.

Even though you intend to pay it, or even if you paid it, your credit score got hit because your credit utilization spiked and the credit bureaus took notice.

[What mortgage rate can I get with my credit score?]

You’ve Still Got the Green Light

As you begin to panic, your loan officer reassures you, and lets you know that you can still refinance!

There’s just one little catch. The mortgage rate you were quoted when you originally spoke isn’t going to be as low, thanks to that credit score ding.

That 30-point hit was enough to push you into a lower credit score tier, which increased a pricing adjustment, and subsequently, your interest rate.

Sure, you can still refinance. But you’ll have a higher-than-expected monthly mortgage payment, and pay that much more in interest each month.

All because you were reckless with your spending before going out and getting a mortgage.

[The refinance rule of thumb.]

It Could Be Worse

While perhaps a lot less likely, if you go nuts and rack up a ton of holiday debt, buying heart-shaped pendants from Kay Jewelers, it could be enough to kill your loan completely.

Put simply, if the debt is large enough to where the minimum monthly payment pushes your debt-to-income ratio beyond acceptable limits, you could be out of luck.

So think those big purchases through if you’ve got ambitious plans to get a mortgage in the New Year.

After all, you wouldn’t want to miss out on securing one of the lowest rates in history thanks to some cheesy diamond-stud earrings.

Your loved ones should understand. Once the refi is done you can shop to your hearts delight and make up for any unmet expectations.

Tip: When holiday shopping, avoid opening up a store credit card or any other line of credit if you plan to refinance in the near future, as doing so can really knock your credit score out of whack.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.


11 Ways to Build Home Equity

These days, home equity is booming thanks to rapidly appreciating property values.

At last glance, total equity on mortgaged properties exceeded $10 trillion, with more than $6.5 trillion of it tappable, per recent figures from Black Knight.

tappable equity

Yes, that’s a “T” not a “B.” But you would of never guessed it less than a decade ago after the housing bubble burst and put millions in underwater positions.

In the early 2000s, it was all about tapping into your home equity with a line of credit or a cash-out refinance, often at absurdly high loan-to-value ratios (such as 100%).

The whole using your house as an ATM thing to make lavish purchases or even just pay the bills each month became the norm.

As a result of all that excess, the narrative quickly changed to overpriced homes, declining equity, negative equity, underwater mortgages, loan modification programs, foreclosures, and so on.

Funny how that works…

This reversal of literal fortune was caused by crashing home prices and zero down mortgages, many of which weren’t properly underwritten to begin with.

Most of those who got into trouble purchased homes at the height of the market at unsustainable prices, while at the same time relying on 100% financing to get the deal done.

This caused lots of homeowners to leave or think about walking away, as home price deprecation was found to be the leading driver of default.

But many of those who stuck around and rode it out are actually in great shape, and even better positions than when they first took out their mortgages.

In fact, those who held on, even if they purchased a home in 2006, could be up 50% today thanks to the recent boom.

However, others are still feeling the negative effects of the housing crisis, even after several years of double-digit home price gains.

If you’re one of those homeowners, or even if you’re not, you may be wondering how to build some home equity.

That way, when it comes time to sell your home (or refinance your mortgage), you can do so without worry.

Those with more home equity will walk away with more cash in their pocket, and if refinancing, may be able to qualify for a lower interest rate.

Let’s look at the many ways you can build equity in your home:

1. Rising home prices – Here’s an easy one that requires no effort on your part.

When property values climb higher, you will gain equity simply because your home or condo will be worth more. It’s as simple as that.

For example, if your home was worth $200,000, and then rose to $250,000 after five years, you’d have $50,000 more equity.

This is the beauty of homeownership, and one of the many advantages of owning a home versus renting.

In fact, the most recent Survey of Consumer Finances (SCF) from the Federal Reserve revealed that homeowners had a net worth of $255,000 versus just $6,000 for renters. A lot of that can be attributed to home equity.

Of course, the opposite can also occur if home prices drop, as we all now know. But at the moment, everything appears to be on the up and up.

2. Falling mortgage balance – Here’s more low-hanging fruit. As you pay off your mortgage each month, you pay a portion of interest and a portion of principal (assuming it’s not an interest-only home loan).

Any principal payments made will boost your equity as your home loan gets paid down.

For example, you’d gain $343 in principal during the first month on a 30-year fixed with a $200,000 loan amount set at 3%.

After a year, that’s about $4,000. And after five years, more than $22,000!

Every time you make your mortgage payment, you’ll gain some home equity. And when combined with an appreciation, it can be a powerful one-two punch.

3. Larger mortgage payments – This one requires more money out of your pocket, but can save you money at the same time.

If you make larger payments each month, with the extra portion going toward principal, you will pay off your mortgage much faster and gain home equity a lot quicker. Simple and effective.

While it will cost you more initially, you’ll pay a lot less interest over time.

For example, your total interest expense would fall from $104,000 to $59,000 if you paid just $200 extra each month, and your mortgage would be paid off nearly a decade early.

4. Biweekly mortgage payments – Here’s another way to save on interest with very little effort.

You can go with a biweekly mortgage payment plan, where you make 26 half payments throughout the year, which equates to 13 monthly payments.

This will shave down your mortgage term, save you a ton in interest, and help you build home equity a lot faster.

There’s also a simple way to do this without having to sign up for a program that may cost money where you just add 1/12 to each monthly payment.

5. Shorter mortgage term – If you’ve got the means, and want to extinguish your home loan earlier, think beyond the 30-year fixed.

It’s possible to refinance into a shorter-term mortgage with a lower mortgage rate, such as a 15-year fixed, which will increase the size of your payments, but build equity at a much higher rate than a traditional 30-year mortgage.

You might also be able to pick something in between, like a 20- or 25-year fixed, or even something that matches your original term, like a 22-year loan term.

This will keep you on track, or even ahead of schedule, and also help you avoid resetting the clock.

6. Avoid refinancing – Conversely, if you don’t refinance and pull cash out, you’ll retain all the equity in your home.

During the prior housing boom, scores of homeowners refinanced their loans over and over until they sucked their equity dry.

This was actually one of the reasons why many chose to walk away, or were forced to sell short or foreclose.

Had they just paid down their loans over time, most would of been in pretty good shape.

Simply put, it’s fine to tap equity, but like everything else, moderation is key.

7. Home improvements – Here’s a potential win-win that you can actually enjoy.

If you make smart home improvements, where the expected value exceeds the cost, you’ll increase your home equity by owning a home that’s worth more.

While it’s seemingly the same exact house, smart home devices, quartz countertops, and stainless steel appliances still draw buyers in, and you might be able to sell for more.

You can even do it for free if it’s your own sweat equity. And in the meantime, you get to enjoy a better house.

8. Maintenance – Now let’s talk about being a responsible homeowner.

Keep your home in tip-top shape and you will be rewarded when it comes time to sell.

If you can unload it for more as a result of proper maintenance, you’ve essentially created more equity in your home.

Home buyers often hit sellers with costly repair requests, but it’ll be more difficult for them to ask for concessions if you took great care of your home.

It could even be prudent to get a home inspection yourself, before you sell, to address any red flags before a buyer tries to get you to pay for them.

9. Curb appeal – This is one of my favorites and something anyone can do to boost their home value, and therefore equity if selling.

I’m referring to curb appeal and also home staging. Make your home look good when you list it and there’s a better chance it’ll sell, and sell for more.

Simple things can make a big difference, such as new paint, carpet, bright lighting, plants, flowers, and even basic cleanliness or a lack of clutter.

Or even how you arrange your home. For example, if home offices are en vogue, make a room that served a different purpose into an office to bring in more buyers.

10. Rent it out – One of the best ways to build equity is to have someone else do it for you.

If you rent out part or all of your property, it’s possible to build equity via the rent you receive from your tenants each month.

Having someone else pay off your mortgage is pretty sweet, especially if the property appreciates at the same time.

11. Bigger down payment – Finally, you can make a larger down payment at the outset to automatically acquire home equity and build it faster thnaks to a lower outstanding balance.

While this may seem like you’re putting money in an illiquid investment, more equity means a lower loan-to-value ratio, which may equate to a lower interest rate, no mortgage insurance, and easier-to-obtain financing.

Over time, that lower mortgage rate and smaller loan balance will mean less interest paid and more equity accrued.

It’s also possible to recast a mortgage or complete a cash in refinance to get your loan balance down and increase your equity.

Just remember that any extra money might be better served elsewhere, such as the stock market or a retirement account.

Bonus: If you happen to be an underwater homeowner, get the bank to grant you principal forgiveness and you’ve essentially built home equity, even if you’re still just above water as a result.


Your Low Mortgage Rate: Here Today, Gone Tomorrow

While the news is just starting to trickle in, over the next week or so you’ll be hearing a lot about how mortgage rates surged higher, and that the days of low rates are behind us.

The mortgage rate surveys will always be a bit delayed, seeing that they always rely on old data. For example, Freddie Mac collects rate quotes from banks and lenders on Monday to Wednesday, and then announces their findings on Thursday.

Unfortunately, a lot can happen in a few short days, or even a few short hours.

It’s kind of like a stock, which can swing up or down throughout the week based on company news and certain economic reports.

It would be somewhat frightening to receive any news that could push your stock higher or lower a day or two after the fact.

This is why you need to be in constant touch with your broker or loan officer, not reading survey days after rates changed.

Why Rates Have Surged

Ever since the positive jobs report was released about a month ago, mortgage rates were dialed on an upward trajectory.

Adding to that unwanted boost was the release of the Fed minutes last week, which revealed that an end could be near for the massive mortgage-backed securities (MBS) shopping spree.

In short, if the Fed isn’t buying billions of MBS each month, someone else will need to fill in for that lack of demand, or prices will need to come down.

Assuming prices of MBS fall, the yield will go up, and so too will mortgage rates. That’s pretty much what we’ve been seeing all week.

In fact, mortgage rates on the 30-year fixed have risen from around 3.5% to over 4% over the past month, with fear anything in the 3% range may be coming to an end.

Put simply, it’s been an ugly sell-off for mortgage bonds, and there doesn’t seem to be any bad news on the horizon to change that.

By bad news, I mean bad economic news that would normally push investors back into bonds, a move known as a “flight to safety.”

If some spell of bad news surfaces, it should push mortgage rates back below the 4% mark, but even then, it will take a long time to get back to where we were.

Unfortunately, in the world of mortgage rates, it takes a lot longer to drop than it does to rise. In other words, lenders are happy to raise their rates in a hurry, but they need a little more convincing to lower them.

Putting It in Perspective

If you’re currently shopping for a home or looking to refinance, and haven’t yet locked your mortgage rate, you’re probably upset or frustrated.

After all, your 30-year fixed was 3.625% at last quote, and today you’re being told it’s 4.125%. What gives?

Well, as mentioned, things move quickly in the mortgage world, and what’s here today may be gone tomorrow. Heck, what’s here this morning may be gone by early afternoon.

It’s for this reason that borrowers are often urged to lock in their rate as opposed to float, to ensure they don’t get caught in a situation like we’re in now.

Fortunately, a ton of borrowers probably locked their rates before the nasty rise, but even if you didn’t, it’s not that bad.

When it comes down to it, mortgage rates are still cheap, cheap, cheap, and the borrower who takes out a mortgage today will still benefit enormously, even if rates aren’t as low as they were last week or last month.

Yes, we all want the lowest rate possible, and it’s easy to get greedy, but in a few years those who took out mortgages today will be pretty darn happy.

Lastly, if you received a rate quote, but didn’t lock, it’s not a bait and switch if your new quote is significantly higher.

Mortgage rates change daily, and a quote is just a quote, nothing more until it’s actually locked and in writing.

If you are being quoted a much higher rate, you may want to shop around just to be sure everyone is pricing higher.

Read more: Mortgage rates vs. home prices

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.