What Mortgage Term Is Best?

Mortgage Q&A: “What mortgage term is best?”

Before you set out to snag the lowest rate on your purchase mortgage or mortgage refinance, you’ll need to decide on (or at least narrow down) a mortgage term.

I’m referring to the amount of time it will take to pay off your home loan in full.

The “mortgage term” is essentially the duration of your mortgage, whether you actually keep it for that length of time or not.

Let’s talk about why it matters and what factors may sway your decision in this department.

Choosing an Appropriate Mortgage Term

long term vs. short term

  • One thing you’ll need to decide on when taking out a home loan
  • Is the duration of the mortgage, known as the “loan term”
  • This is how long it will take to pay off the mortgage in full
  • Based on regular monthly principal and interest payments

First off, your mortgage payments and the amount of interest you pay will be determined, in large part, by the term of your mortgage.

For example, a 15-year mortgage is paid off in half the amount of time as a 30-year mortgage, so the monthly mortgage payment will be much higher.

It won’t be double the amount of the 30-year because you’ll pay less interest over a shorter period of time, but it’ll be significantly higher.

Generally, you’re looking at a mortgage payment that is 1.5X that of the 30-year term mortgage.

This can obviously stretch a budget thin, so it’s important to decide on term before shopping to ensure you wind up with the right loan program to fit your unique financial profile.

The 30-Year Mortgage Term Is Standard

mortgage terms

  • The 30-year fixed mortgage is the most popular loan program available
  • It features a 30-year loan term and a fixed rate for the entire duration
  • Most ARMs also have a 30-year term despite coming with adjustable interest rates
  • However there are plenty of other terms available too so be sure to explore all of them!

Most mortgages are based on a 30-year amortization, meaning they are paid off in full after 30 years.

At the same time, not all 30-year mortgages are fixed for 30-years.

That’s right, there are a ton of mortgages based on a 30-year payoff schedule that can adjust monthly or annually for much of that time.

A common example would be the 5/1 adjustable-rate mortgage, which is amortized over and due in 30 years, but adjustable after just five.

It’s fixed for the first five years, and adjustable for the remaining 25, but still a 30-year term loan.

Same goes for a 7/1 or a 10/1 ARM, except their fixed period is seven or 10 years, respectively, before going adjustable.

15-Year Mortgage Terms Are Also Very Common

  • Aside from 30-year terms, 15-year terms are the next most common
  • They require much higher monthly mortgage payments
  • As a result of the shorter amortization period
  • But can result in big savings and lower interest rates

Then there are 15-year term mortgages, which are amortized and paid off in 15 years.

They too are fixed for the entire duration, so you don’t have to worry about your mortgage rate adjusting higher (or lower, not that you’d be concerned about that).

These are a great choice if you want to pay off your mortgage early, assuming your money isn’t better served elsewhere.

With a 15-year mortgage, you’ll enjoy a lower mortgage rate than a 30-year loan, and pay much less interest. A win-win really.

Let’s look at an example, assuming the loan amount is $200,000.

30-year payment: $998.57 (4.375% rate)
Total interest paid: $159,485.20

15-year payment: $1,429.77 (3.50% rate)
Total interest paid: $57,358.60

As you can see, the interest rate is 0.75% lower on the 15-year term loan.

This isn’t unusual because lenders are willing to offer a discount to homeowners who pay off their mortgages faster.

If you need three decades to pay off your mortgage, and want a fixed interest rate for that entire time period, you’re going to pay extra for it via a higher mortgage rate.

Anyway, the 15-year mortgage would save you roughly $100,000 in interest over the full loan term, but your monthly mortgage payment would be about 50 percent higher.

If you could handle it, and actually want to pay down your mortgage, it’d be a worthwhile move, especially if you happened to be refinancing from a higher rate.

For example, if you rate was 6.5% on a 30-year term, refinancing to a rate of 3.5% on a 15-year term today would only be an additional $200 a month.

That’s a pretty good tradeoff for a relatively small bump in monthly payment.

Someone looking to retire who wanted to own a home free and clear could be a candidate for a shorter-term mortgage.

Same goes for someone living in an area of the country where home prices aren’t too high. The difference in monthly payment might be relatively negligible.

[30-year fixed vs. 15-year fixed]

What Other Mortgage Terms Are Available?

  • Other mortgage terms include 10-, 20-, 25-, and 40-year terms
  • But not all banks and lenders offer these options
  • You may also be able to choose your own home loan term
  • Where you can pick any loan term you like

Mortgage terms don’t stop at 30 and 15. There are plenty of other options, including 10-year, 20-year, 25-year, 40-year, and even five-year terms.

Yep, you can pay your mortgage off in just 10 years or stretch it out to 40 years if you need a little more time.

The longest mortgage term I’ve seen was 50 years, but that was gimmicky and short lived, for good reason.

If 15 years is too quick, but 30 is too long, there’s always the 20-year mortgage.

There are even mortgages amortized over 40 years that are due in 30, so the options are endless really.

The five-year term refers to balloon mortgages where the loan is due in full after just five years.

Of course, they’re set up so borrowers refinance/sell at that time, and they’re amortized over 30-years, making them affordable on a monthly basis.

The shortest mortgage term where the loan is actually paid off in full would likely be the 10-year fixed mortgage.

As the name indicates, it has an interest rate that doesn’t change and is paid off in just a decade.

While it might be offered by certain lenders, it could well be out of reach for most homeowners because mortgage payments will be roughly double that of a 30-year loan.

Note: Mortgages with terms longer than 30 years and balloon mortgages have essentially become fringe products because they fall out of the so-called Qualified Mortgage (QM) definition that affords lenders extra protections.

Average Mortgage Term Is Much Shorter

  • Most homeowners don’t keep their mortgages full-term
  • Instead they’re often kept for less than a decade
  • So consider that if you want to save some money
  • You might be able to go with a cheaper ARM instead

Keep in mind that most people only hold onto their mortgages for about seven to 10 years.

This is a result of either selling the home and moving on, or refinancing the existing mortgage to take advantage of lower mortgage rates, or to get cash out.

So whatever mortgage term you choose, be sure it makes sense for your particular situation, and also from both a mortgage rate and monthly payment perspective.

How Long Should Your Mortgage Term Be?

  • Consider how long you plan to keep the property in question
  • Affordability may also dictate loan term choice
  • Those moving relatively soon may be benefit from an ARM with a 30-year term
  • While those purchasing forever homes who can afford it may want a 15-year fixed

Ultimately, most homeowners are going to go with a 30-year term, and in all likelihood, a 30-year fixed.

It commands something like a 90% market share for purchase mortgages and 75% share for refinances.

But that doesn’t necessarily mean it’s the right loan choice for all these borrowers.

If you think you may move in just a few years, perhaps because you bought a starter home, the 30-year fixed may actually be a bad choice.

After all, the interest rate will be higher and the benefit (of the fixed interest rate) not fully realized if only kept a few years.

Conversely, don’t go after a 15-year term if you think you’ll have a tough time making the larger payments.

For many, this might not even be an option due to DTI constraints, which limit how much you can borrow.

Similarly, you may not want to pick a 20-year term or 25-year term over a 30-year loan if the rate isn’t significantly better (or at all different) and affordability is a concern.

You can always pay extra on your mortgage later to save money on interest and whittle down the loan term.

How to Change Your Mortgage Term

  • If you want to decrease or increase your loan term
  • A standard refinance will likely be your best option
  • Many homeowners switch from 30-year to 15-year term loans
  • To stay on track and obtain lower interest rates

So we know the typical mortgage term is 30 years, but what if you want to change the length of your mortgage?

Let’s say you were a first time buyer, and like 90% of other home buyers, went with a 30-year fixed.

One day you tinker around with a mortgage calculator and realize you’re going to pay hundreds of thousands dollars in interest and not pay off your loan until you’re 70.

Now what? Panic, bury your head in the sand? No. Do something about it, assuming you want to.

The easiest and most straightforward method is to execute a rate and term refinance. Notice it says term right in the phrase…

While refinancing to a lower interest rate can result in monthly payment savings, going from one 30-year loan to another means you’re resetting the clock.

By this, I mean getting even further away from paying off your mortgage in full.

What some savvy homeowners do is refinance from a 30-year term to a 15-year term. That way they don’t extend their loan term, and in some cases actually shorten it.

As noted, mortgage rates are also cheaper on 15-year mortgages, so the savings can be two-fold.

If you can’t or don’t want to refinance, you can also just pay extra each month to effectively shorten the loan term.

To summarize, the longer the loan term, the lower the mortgage payment, but the more interest you’ll pay, and the longer it will take to build home equity.

Further complicating matters is the fact that some folks don’t want to pay off their mortgages, and would rather invest their money elsewhere.

Either way, make a plan and think about what your short-term and long-term goals are before diving in.

Tip: If you aren’t sure what loan term to pick, you can always make larger payments on a longer-term loan (biweekly mortgage payments).

If you go with a shorter term, you’re stuck with a larger monthly payment no matter what.

To err on the side of caution, you can go with the standard 30-year term and make extra principal payments if and when you desire.

Source: thetruthaboutmortgage.com

Mortgage Down Payment Requirements: How Much Do I Need to Put Down?

Last updated on July 27th, 2020

If you’re in the market to buy a new home or condo, you’ve undoubtedly thought (or stressed) about the required down payment.

It’s one of the biggest roadblocks to homeownership, and an obstacle that never seems to get any better over time.

In fact, Zillow recently noted that it takes the average American over seven years to save up a 20% down payment. So much for instant gratification…

But how much should you put down when buying a home? Better yet, how much do you need to put down? Well, let’s talk about that.

How Mortgage Down Payments Used to Work

  • It used to be common to put down 20% or more when buying real estate
  • As home prices got expensive, lenders began offering zero down financing
  • The mortgage crisis hit and low down payments were partially to blame
  • But now we’re back to allowing a relatively low 3% to 3.5% down

Before the mortgage crisis unfolded, perhaps in the late 1990s and early 2000s, it was quite common for homeowners to come up with at least 20% of the sales price for down payment.

This was the traditional number banks deemed acceptable in terms of risk.

So prospective homeowners took their time, saved up money in the bank, and when the time was right, made a bid on a property.

The way the banks saw it, borrowers had “skin in the game,” and were therefore a pretty safe bet when it came to making timely mortgage payments.

Even if they did fall behind, those down payments ensured the bank wouldn’t be stuck holding a property that was worth less than the mortgage.

And there would be enough of a buffer to offload it without much if any loss.

Then Mortgages Got Risky…

  • Lenders got aggressive as home prices shot higher and higher
  • Most allowed home buyers to obtain a mortgage with zero out of pocket
  • This became a major problem once home prices started to fall
  • And explains why we saw so many underwater borrowers during the crisis

In the early 2000s, mortgage lenders got more and more aggressive, allowing homeowners to come in with little or even nothing down.

In fact, closing costs could be piled on top of the loan, so you could get a mortgage with absolutely no out-of-pocket expenses.

You may also recall the radio commercials about no cost refis, which were called the biggest no-brainer of all time!

Anyway, this was all predicated on the idea that home prices would appreciate up and up, forever and ever.

So even if you didn’t have much of a down payment to start, you could bank on some fairly instant home equity via guaranteed appreciation.

Of course, we all know how that turned out, and that’s why many of these types of loan programs are no longer available. This is probably a good thing.

Sure, there are still some programs kicking around that allow you to come in with nothing down, but there are a lot of eligibility requirements and income restrictions.

What Is the Minimum Down Payment on a House?

mortgage down payment

Loan Type Minimum Down Payment Availability
Conforming loan (Fannie Mae and Freddie Mac) 3% Anyone, loan limits apply
FHA loan 3.5% Anyone, loan limits apply
Portfolio loan 0% Guidelines vary by lender
USDA loan 0% Rural areas only, income limits apply
VA loan 0% Veterans and active duty only

The most widely used zero down mortgage program currently available is offered by the U.S. Department of Veterans Affairs.

However, VA loans are only available to veterans and active duty military, which represents just a fraction of the population.

There’s also the USDA’s rural home loan program. But again, the reach is limited because they’re only available to lower-income home buyers outside major metropolitan areas.

Nowadays, for the vast majority of borrowers who didn’t serve this country or purchase a home in a rural area, a down payment will be required, though not necessarily a large one.

The one exception might be a portfolio lender, which keeps the loans it originates on its books, and thus can write any underwriting guidelines it sees fit. But again, these types of loans are few and far between.

Ultimately, if you’re looking to put very little down, the next closest thing is a Fannie Mae HomeReady mortgage or Freddie Mac Home Possible mortgage.

These programs allow borrowers to come in with as little as 3% down when purchasing a piece of property. And the down payment can be a gift, grant, or a loan from a non-profit organization or an employer.

To sweeten the deal even more, the mortgage insurance is cheaper and there are lower pricing adjustments.

This means you can obtain a lower mortgage rate than would otherwise be possible, and keep the total housing payment down thanks to cheaper PMI.

You can obtain these loans just about anywhere via white-label products like Wells Fargo yourFirst Mortgage and Bank of America’s Affordable Loan Solution, to name just two.

You Don’t Need a Down Payment Calculator to Run the Numbers

  • It’s very easy to calculate potential mortgage down payments
  • Just whip out a standard calculator
  • And multiply the percentage by the purchase price
  • For example 20% down would be .2 x $500,000 = $100,000

Now let’s talk about calculating a down payment when home shopping.

It’s actually very easy to calculate a down payment once you have a purchase price in mind, and no fancy mortgage calculator is required, honest.

Simply take a regular calculator (the one on your smartphone will suffice) and multiply the purchase price by the percentage you’d like to put down and you’ll get your answer.

For example, if you want to put down 20% on a $300,000 home purchase, just type in .2 and multiply it by 300,000. That would result in a $60,000 down payment.

Or if you want to put just 10% down, input .1 and multiply it by 300,000. That would give us a $30,000 down payment.

You can also do this in reverse if you know you have a certain amount saved up and earmarked for a house down payment.

Say you’ve got $50,000 in the bank and you won’t/can’t muster any more than that. Again, let’s assume you want to put down 20% because of the associated benefits.

To calculate the maximum purchase price, just input 50,000 into a standard calculator and divide it by .2.

This will result in a sum of 250,000, meaning if you’ve got $50,000 set aside, you can buy a $250,000 house and put 20% down.

Just don’t forget the closing costs, which can greatly increase your actual out-of-pocket expenses and require even more to be set aside.

Mortgage Insurance Often Required If Little Is Put Down

  • If you put down less than 20% when buying a home
  • Or opt for a government mortgage such as an FHA loan
  • You will have to pay mortgage insurance
  • Which is one of the disadvantages of a low down payment mortgage

For most home loan programs, mortgage insurance will be required by the lender if your loan-to-value ratio (LTV) exceeds 80%.

In other words, if you put down less than 20%, you’ll be stuck paying insurance to compensate for the increased risk to the lender.

This is on top of homeowners insurance, so don’t get the two confused. You pay both! And the mortgage insurance protects the lender, not you in any way.

Obviously, this extra fee will increase your monthly housing expense, making it less attractive than coming in with a 20% down payment.

But for many would-be home buyers, a 20% down payment just isn’t a reality, especially with home prices on the rise.

If you opt for an FHA loan, which allows down payments as low as 3.5%, you’ll be stuck paying an upfront mortgage insurance premium and an annual insurance premium.

And annual premiums are typically in force for the life of the loan. This explains why many opt for a FHA-to-conventional refi once their home appreciates enough to ditch the MI.

If you take out a conventional home loan with less than 20% down, you’ll also be required to pay private mortgage insurance in most cases.

This is less than ideal if you’re trying to keep your costs down, but a decent option for those with little in the bank.

If you don’t want to pay it separately, you can build the PMI into your interest rate via lender-paid mortgage insurance, which might be cheaper than paying the premium separately every month. Just be sure to weigh both options.

Tip: If you put less than 20% down, you’re still paying mortgage insurance.

Mortgage Rates Are Higher on Low Down Payment Loans

  • If you put little to nothing down when purchasing a home
  • Expect your mortgage interest rate to be higher
  • All else being equal
  • To account for the elevated default risk posed to lenders

Regardless of what you wind up paying in mortgage insurance premiums, know that your mortgage rate will likely be higher if you come in with less than 20% down.

Again, we’re talking about more risk for the lender, and less of your own money invested, so you must pay for that convenience.

Generally speaking, the less you put down, the higher your interest rate will be thanks to costlier mortgage pricing adjustments, all other things being equal.

And a larger loan amount will also equate to a higher monthly mortgage payment.

This can make qualifying more difficult if you’re close to the affordability cutoff.

So you should certainly compare different loan amounts and both FHA and conventional loan options to determine which works out best for your unique situation.

A Smaller Mortgage Down Payment Can Leave a Helpful Cushion

  • You don’t necessarily need a large down payment to buy
  • Especially if it will leave you with little in your bank account
  • Sometimes it’s better to have money set aside for an emergency
  • While you build your asset reserves over time

While a larger mortgage down payment can save you money, a smaller one can ensure you have money left over in the case of an emergency, or simply to furnish your home and keep the lights on!

Most folks who buy homes make at least minor renovations before or right after they move in. They also spend money on moving trucks and/or movers.

Then there are the costly monthly utilities to think about, along with unforeseen maintenance issues that tend to come up.

If you spend all your available funds on your down payment, you might be living paycheck to paycheck for some time before you get ahead again.

In other words, make sure you have some money set aside after everything is said and done.

The lender will probably require that you have some cash reserves in order to close your mortgage, but even if they don’t, it’s wise to make it a requirement for yourself.

Tip: Consider a combo loan, which breaks your mortgage up into two loans. Keeping the first mortgage at 80% LTV will allow you to avoid mortgage insurance and ideally result in a lower blended interest rate.

Or get a gift from a family member – if you bring in 5-10% down, perhaps they can come up with another 10-15%.

Source: thetruthaboutmortgage.com

Tools for Buying a House? You May Want to Avoid the 30% Rule – Lexington Law

rebuilding credit

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Ask someone the question, “How much should I spend on a house?” and there’s a good chance that they will respond with the 30% rule.

The 30% rule, which says not to spend more than 30% of your income on housing, is a good place to start, but it’s not always the best gauge of how much should you spend on housing. You don’t want to base your entire financial situation on it — especially since it’s not exactly clear what that 30% includes.

What Is the 30% Rule?

The 30% rule has been around since the 1930s, according to the Census Bureau. Back then, policymakers were trying to make housing affordable. They came up with the idea that you could spend about 30% of your income on housing and still have enough left for other expenses.

Over time, those numbers started to get used in home loans as well. A rough sketch of what you could afford, in terms of monthly payment, could be obtained by estimating 30% of your income.

Is the 30% Rule Right for You?

When deciding on your own 30% rule, it’s probably a good idea to base it on your take-home pay, rather than your gross income. Let’s say you bring home $3,500 a month. According to the 30% rule, that means you shouldn’t spend more than $1,050 on your housing payment.

Some folks like to use their gross income for this calculation, but that can get you into trouble in the long run. If you base what you spend on housing on an amount that you might not be bringing home, that can stress your budget.

Think about it: If your pre-tax pay is $3,800 a month, that lifts your max housing payment to $1,140. That’s $90 more per month. But the reality is that you are bringing home $300 less than your gross income. Trying to come up with another $90 a month could put a strain on your budget.

Don’t Forget About Extra Costs

You can use a mortgage calculator to figure out how much you should spend on housing. However, such calculators typically just include principal and interest. This doesn’t take into account other monthly homeownership costs.

If you’re thinking of buying an expensive house, don’t forget about other costs like insurance and taxes.

Experts suggest that you base your 30% figure on all your monthly payment costs, not just the principal and interest.

What Percentage of Income Should Be Spent on Housing?

But it goes beyond that for some homebuyers. When looking into buying a home or an affordable place to rent, don’t just base your estimates on your monthly payment. You should also include estimated utility costs and an estimate for maintenance and repairs.

HouseLogic suggests you budget between 1% and 3% of your home’s purchase price annually for repairs and maintenance. I like the idea of budgeting 2%. So, on a $200,000 home, that means you can expect to pay $4,000 for repairs and maintenance — about $333.33 per month.

Once you start adding in all the other aspects of homeownership, suddenly that 30% rule is less cut-and-dry. If you’re more conservative, adding up all the monthly costs of homeownership and keeping it all under 30% makes sense.

You’re less likely to overspend that way. But it might mean a smaller, less expensive home.

Consider the 28/36 Qualifying Ratio

Instead of relying on the 30% rule to answer the question, “How much should I spend on a house?”, consider using the 28/36 qualifying ratio.

According to Re/Max, many lenders use the 28/36 rule to figure out whether your finances can handle your home purchase. The 28 refers to the percentage of your gross monthly income that should be spent on your monthly housing cost. The 36 refers to the percentage of income that goes toward all your debt payments, including your mortgage.

So, if you make $3,800 in take-home pay, your monthly payment should be no more than $1,064. But, things get stickier when you calculate the 36% part of the ratio. Your total debt payments shouldn’t exceed $1,368. That leaves you about $304 for payments of other debts.

Let’s say your credit card and auto loan payments total $500. That means you’re going to have to adjust your expectations for what you can expect to pay for a mortgage. In fact, if your lender insists on the 36 part of the ratio, you have $196 less you can spend on your mortgage payment. And that might mean a less expensive house.

When figuring out what percentage of income you should spend on housing, base the calculations on your take-home pay. Even though Re/Max says many lenders use your gross pay for the 28/36 qualifying ratio, this way you’ll play it safe.

How Much Should I Spend on a House?

Everyone has to answer the “How much should I spend on a house?” question for themselves. However, the biggest reason to ditch the 30% rule is that you might not be comfortable with it.

Are you really comfortable spending 30% of your income each month on your housing? When you consider your other payment obligations, does it makes sense for you to spend so much on housing?

If you aren’t sure about the 30% rule, use your own rule. You might be more comfortable with 25% on all of your housing costs. Or perhaps you modify the rule. Maybe you spend 20% on mortgage and interest and keep your total housing costs to 25% or 28%.

No matter what you decide, the important thing is to be responsible with your finances. Only spend what you feel comfortable with on housing or rent.

This article originally appeared on Credit.com.

here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Source: lexingtonlaw.com

Tools for Buying a House? You May Want to Avoid the 30% Rule

rebuilding credit

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Ask someone the question, “How much should I spend on a house?” and there’s a good chance that they will respond with the 30% rule.

The 30% rule, which says not to spend more than 30% of your income on housing, is a good place to start, but it’s not always the best gauge of how much should you spend on housing. You don’t want to base your entire financial situation on it — especially since it’s not exactly clear what that 30% includes.

What Is the 30% Rule?

The 30% rule has been around since the 1930s, according to the Census Bureau. Back then, policymakers were trying to make housing affordable. They came up with the idea that you could spend about 30% of your income on housing and still have enough left for other expenses.

Over time, those numbers started to get used in home loans as well. A rough sketch of what you could afford, in terms of monthly payment, could be obtained by estimating 30% of your income.

Is the 30% Rule Right for You?

When deciding on your own 30% rule, it’s probably a good idea to base it on your take-home pay, rather than your gross income. Let’s say you bring home $3,500 a month. According to the 30% rule, that means you shouldn’t spend more than $1,050 on your housing payment.

Some folks like to use their gross income for this calculation, but that can get you into trouble in the long run. If you base what you spend on housing on an amount that you might not be bringing home, that can stress your budget.

Think about it: If your pre-tax pay is $3,800 a month, that lifts your max housing payment to $1,140. That’s $90 more per month. But the reality is that you are bringing home $300 less than your gross income. Trying to come up with another $90 a month could put a strain on your budget.

Don’t Forget About Extra Costs

You can use a mortgage calculator to figure out how much you should spend on housing. However, such calculators typically just include principal and interest. This doesn’t take into account other monthly homeownership costs.

If you’re thinking of buying an expensive house, don’t forget about other costs like insurance and taxes.

Experts suggest that you base your 30% figure on all your monthly payment costs, not just the principal and interest.

What Percentage of Income Should Be Spent on Housing?

But it goes beyond that for some homebuyers. When looking into buying a home or an affordable place to rent, don’t just base your estimates on your monthly payment. You should also include estimated utility costs and an estimate for maintenance and repairs.

HouseLogic suggests you budget between 1% and 3% of your home’s purchase price annually for repairs and maintenance. I like the idea of budgeting 2%. So, on a $200,000 home, that means you can expect to pay $4,000 for repairs and maintenance — about $333.33 per month.

Once you start adding in all the other aspects of homeownership, suddenly that 30% rule is less cut-and-dry. If you’re more conservative, adding up all the monthly costs of homeownership and keeping it all under 30% makes sense.

You’re less likely to overspend that way. But it might mean a smaller, less expensive home.

Consider the 28/36 Qualifying Ratio

Instead of relying on the 30% rule to answer the question, “How much should I spend on a house?”, consider using the 28/36 qualifying ratio.

According to Re/Max, many lenders use the 28/36 rule to figure out whether your finances can handle your home purchase. The 28 refers to the percentage of your gross monthly income that should be spent on your monthly housing cost. The 36 refers to the percentage of income that goes toward all your debt payments, including your mortgage.

So, if you make $3,800 in take-home pay, your monthly payment should be no more than $1,064. But, things get stickier when you calculate the 36% part of the ratio. Your total debt payments shouldn’t exceed $1,368. That leaves you about $304 for payments of other debts.

Let’s say your credit card and auto loan payments total $500. That means you’re going to have to adjust your expectations for what you can expect to pay for a mortgage. In fact, if your lender insists on the 36 part of the ratio, you have $196 less you can spend on your mortgage payment. And that might mean a less expensive house.

When figuring out what percentage of income you should spend on housing, base the calculations on your take-home pay. Even though Re/Max says many lenders use your gross pay for the 28/36 qualifying ratio, this way you’ll play it safe.

How Much Should I Spend on a House?

Everyone has to answer the “How much should I spend on a house?” question for themselves. However, the biggest reason to ditch the 30% rule is that you might not be comfortable with it.

Are you really comfortable spending 30% of your income each month on your housing? When you consider your other payment obligations, does it makes sense for you to spend so much on housing?

If you aren’t sure about the 30% rule, use your own rule. You might be more comfortable with 25% on all of your housing costs. Or perhaps you modify the rule. Maybe you spend 20% on mortgage and interest and keep your total housing costs to 25% or 28%.

No matter what you decide, the important thing is to be responsible with your finances. Only spend what you feel comfortable with on housing or rent.

This article originally appeared on Credit.com.

here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Source: lexingtonlaw.com

What Mortgage Has the Best Interest Rate?

Here’s an interesting question: “What mortgage has the best interest rate?”

Before we dive in, “best” questions are always a bit difficult to answer universally because what’s best to one person could be the worst for another. Or at least not quite the best.

But we can still examine what makes one mortgage rate on a certain product better than another, in certain situations.

In a recent post, I touched on the different mortgage terms available, such as a 30-year, 15-year, and so on.

That too was a “best” article, where I attempted to explain which mortgage term would be best in a particular situation.

Related to that is the associated mortgage interest rate that comes with a given term.

Longer Term = Higher Mortgage Rate

best rate

  • The longer the mortgage rate is fixed
  • The higher the interest rate will be all else being equal
  • To compensate the lender for taking more risk
  • On interest rates over a longer period of time

Now I’m going to assume that by best you mean lowest, so we’ll focus on that definition, even though it might not be in your best interest. A lot of puns just happened by the way.

Simply put, a longer mortgage term generally translates to a higher mortgage rate.

So a 10-year fixed-rate mortgage will be much cheaper than a 40-year fixed loan for two borrowers with similar credit profiles and lending needs.

Additionally, an adjustable-rate mortgage will price significantly lower than a fixed-rate loan, as you’re guaranteed a steady rate for the full term on the latter.

This all has to do with risk – a mortgage lender is essentially giving you an upfront discount on an ARM in exchange for uncertainty down the road.

With the fixed-rate loan, nothing changes, so you’re paying full price, if not a premium for the peace of mind.

If the interest rate is fixed, the shorter term loan will be cheaper because the lender doesn’t have to worry about where rates will be in 20 years.

For example, they can offer you a lower mortgage rate on a 10-year term versus a 30-year term because the loan will be paid off in a decade as opposed to three.

After all, if rates rise and happen to triple in 10 years, they won’t be thrilled about your low rate that’s fixed for another 20 years.

That’s all pretty straightforward, but knowing which to choose could be a bit more daunting, and may require dusting off a mortgage calculator.

Mortgage Interest Rates from Cheapest to Most Expensive

  1. 1-month ARM (cheapest)
  2. 6-month ARM
  3. 1-year ARM
  4. 3/1 ARM
  5. 5/1 ARM
  6. 10-year fixed
  7. 7/1 ARM
  8. 15-year fixed
  9. 10/1 ARM
  10. 30-year fixed
  11. 40-year fixed (most expensive)

This can definitely vary from bank to bank, but it’s a rough order of how mortgage rates might be priced from lowest to highest, at least in my view.

Most lenders don’t even offer all these products, but you can get an idea of what’s cheapest and most expensive based on its term and/or how long it’s fixed.

Currently, the popular 30-year fixed is pricing at 4.06%, while the 15-year fixed is going for 3.51%, per the latest weekly Freddie Mac data.

The hybrid 5/1 ARM, which is fixed for the first five years and adjustable for the remaining 25, is averaging a slightly lower 3.68%.

[How to get the best mortgage rate.]

There are many other mortgage types, such as the 20-year fixed, 40-year fixed, 10-year ARM, 7-year ARM, and so on. But we’ll focus on those first three, as they’re the most popular.

As you can see, the 30-year fixed is the most expensive. In fact, it’s nearly half a percentage point higher than the average rate on a 5/1 ARM.

This spread can and will vary over time, and at the moment isn’t very wide, meaning the ARM discount isn’t great.

At other times, it might be a difference of one percent or more, making the ARM a lot more compelling.

Anyway, on a $200,000 loan amount, that would be a difference of roughly $44 in monthly mortgage payment and about $2,640 over five years.

A 3/1 ARM or one-year ARM would be even cheaper, though probably just slightly. And for a loan that adjusts every three years or annually, it’s a big risk in an environment where interest rates are likely at or near the bottom.

As mentioned, the low initial rate on the 5/1 ARM is only guaranteed for five years, and then it becomes annually adjustable for the remainder of the term. That’s a lot of years of uncertainty. In fact, it’s 25 years of risk.

The 30-year fixed is, well, fixed. So it’s not going higher or lower at any time during the loan term.

The ARM has the potential to fall, but that’s probably unlikely given where rates are historically. And lenders often impose interest rate floors that limit any potential interest rate improvement.

[30-year fixed vs. ARM]

So What’s the Best Interest Rate Then?

  • The best mortgage rate is the one that saves you the most money
  • Once you factor in the monthly payment, closing costs, and interest expense
  • Along with what your money could be doing elsewhere
  • And what your plans are with the underlying property (how long you intend to keep it, etc.)

The best interest rate? Well, that depends on a number of factors unique to you and only you.

Do you plan to stay in the property long-term, or is it a starter home you figure you’ll unload in a few years once it’s outgrown?

And is there a better place for your money, such as the stock market or another high-yielding investment?

If you plan to sell your home in the medium- or near-term, you could go with an ARM and use those monthly savings for a down payment on a subsequent home purchase.

Just be sure you have enough money to make larger monthly payments if and when your ARM adjusts higher if you don’t actually sell or refinance your mortgage before then.

Five years of interest rate stability not enough? Look into 7/1 and 10/1 ARMs, which don’t adjust until after year seven and 10, respectively.

That’s a pretty long time, and the discount relative to a 30-year fixed could be well worth it. Just expect a smaller one relative to shorter-term ARMs.

If you’ve got plenty of money and actually want to pay off your mortgage early, a 15-year fixed will be the best deal, as you’ll get the lowest, fixed rate available.

The shorter term also means less interest will be paid to the lender. The downside is the higher monthly payment, something not every homeowner can afford.

As a rule of thumb, when interest rates are low, it makes sense to lock in a fixed rate, especially if the ARM discount isn’t a lot.

Conversely, if interest rates are high, taking the initial discount with an ARM may make sense.

In the event rates have fallen when it comes time to refinance (after the initial fixed period comes to an end), you could make out really well.

And even if rates fall shortly after you get your mortgage, you can always refinance to another ARM, thereby extending your fixed period a bit longer.

Or simply go for a fixed-rate mortgage if rates get really good.

The other side of the coin is that rates could keep climbing, putting you in a tough spot if your ARM adjusts higher and interest rates aren’t favorable at the time of refinancing.

Ultimately, you’re always taking a risk with an ARM, though you could also be leaving money on the table with the fixed-rate loan, especially if you don’t keep it anywhere close to term.

Either way, watch those closing costs and be wary of resetting the clock on your mortgage if your ultimate goal is to pay it off in full.

In the end, it may all just come down to what you’re comfortable with.

For many, the stress of an ARM simply isn’t worth any potential discount, so perhaps a fixed mortgage is “best.”

Read more: Which mortgage is right for me?

Source: thetruthaboutmortgage.com

Do Mortgage Rates Change Daily?

It’s that time again folks, where I answer your burning mortgage questions.

The latest mortgage Q&A: “Do mortgage rates change daily?”

Mortgage rates are hot news right now, what with them hovering around all-time lows yet again but beginning to inch higher.

And it seems everyone is interested to see if they can save a little money on their current mortgage payment via a refinance or get into a new home with a super low rate.

But while mortgage rates have been historically low years, they’ve also been extremely volatile as a result of all the government tinkering and the economy at large.

So when shopping for a home loan, it’s now more important than ever to keep a close eye on loan rates, because they can and will change daily (learn more about how mortgage rates are determined).

The interest rate you receive is one of the most important aspects of the home financing process, so you’ll want to get it right.

Heck, it can even make or break your home buying decision if affordability becomes a roadblock!

Mortgage Rate Sheets Are Printed Monday Through Friday

  • New lender rate sheets are released daily throughout the week
  • Monday through Friday unless it’s a holiday
  • Sometimes interest rates will be different, sometimes they’ll remain unchanged
  • Depending on what transpired the day before or the morning of

Each morning, Monday through Friday, banks and their loan officers get a fresh “mortgage rate sheet” that contains the pricing for that day.

I know because when I first started in the industry, I got tasked with handing them out to fellow employees (back when we used paper).

I’ll never forget kicking the printer every time it broke, which as far as I can remember was also Monday through Friday.

Anyway, these rate sheets contain the day’s current mortgage rates, which are critical to anyone working in the biz.

Without them, loan officers can’t provide quotes to borrowers unless they’re using some sort of computer system, which some of the big retail banks probably rely upon.

All loan programs offered by a given bank will be featured, including fixed rates like the 30-year fixed, 20-year fixed, and 15-year fixed, along with other loan types offered such as adjustable-rate mortgages.

Expect fixed mortgages to move more than ARMs on a daily basis, seeing that ARMs come with short-term promo rates that adjust over time, whereas mortgage bankers are taking a bigger risk by offering a rate that will never change.

You might see a slight difference in pricing between conforming mortgages backed by Freddie Mac and Fannie Mae’s guidelines, even though they’re nearly the same product. So ask for pricing on each if both are offered.

There will also be a section for jumbo loans, FHA loans, VA loans, and other government loans offered such as an FHA streamline.

Each type of loan will have its own section on the rate sheet page with corresponding pricing, which details how many discount points must be paid, or conversely, if a lender credit is offered at a certain price.

These rate sheets are also what mortgage brokers rely on to get pricing updates from all the banks and wholesale lenders they work with.

Check Out Daily Mortgage Rates on Lender Websites

  • If you don’t have access to lender rate sheets
  • Visit lender websites to access their daily mortgage rates
  • Keep track of them over time and make note of any changes
  • To determine their direction or any obvious trends

If you’re a consumer without access to mortgage lenders’ rate sheets, you can check their websites for purchase and refinance rates, though these aren’t nearly as reliable, and are typically just advertised rates with lots of assumptions.

While probably closer to national averages, you can at least glean some information, like mortgage rate trends if you see that they’re rising or falling over time.

Prospective home buyers may want to bookmark some mortgage lenders’ pages that feature today’s mortgage rates to chronicle them over time and stay in the know.

You’ll be able to get a better idea of monthly payments and hone in on the rent vs buy question.

Anyway, to answer the initial question, yes, mortgage rates can change daily, but only during the five-day workweek.

Mortgage rates do not change during the weekend, though pricing can definitely change between Friday and Monday depending on what happens on Monday morning.

In other words, pricing you receive on Friday could certainly differ from the pricing you receive on Monday morning depending on what transpires between then.

This is similar to the stock market or any other financial market for that matter. It’s constantly in flux and as such, things change, a lot.

Ask for Mortgage Rate Updates Daily

  • Ask for rate updates daily until you lock in your rate
  • Rates can move higher or lower based on a number of factors
  • Economic news, reports, data, and even geopolitical activity
  • Can significantly impact rates throughout the week

If you want to know where mortgage rates are for a given day, call your bank or broker and ask; and don’t be afraid to call every day to keep track of mortgage rates, as it’s their job to keep you informed.

Sure, they might be annoyed that you’re constantly asking for updates, but it’s their duty to provide you with this information.

It’s extremely important because it will determine how much you pay each month and over the life of the loan. So they should be more than understanding and happy to provide updated pricing.

After all, you’re the one that will be stuck paying that rate for the next 360 months if you go with a 30-year loan, so it’s worth the small effort.

Don’t just assume that the last rate quote they gave you, or the initial one to get you in the door, still stands. It could be completely different a week or even a day later.

Tip: Freddie Mac’s weekly survey just details what rates average during the week from several lenders, not necessarily the daily rate available to you.

Mortgage Rates Can Change During the Day

  • Intraday rate changes are also possible
  • If significant economic events take place during market hours
  • Like Fed meetings, major policy changes, or geopolitical events
  • That alter demand for bonds and/or mortgage-backed securities (MBS)

So we know mortgage rates have the ability to change on a daily basis, but sometimes mortgage rates may even change more than once during the same day if certain economic reports are released.

Things like Federal Reserve meetings, a bump in the 10-year Treasury yield, MBS prices, home sales data, economic activity, and other related mortgage news may make rates rise from day to day.

In other words, your interest rate is never really secure until it is locked and you receive written confirmation from the lender.

For example, a mortgage rate quote provided in the morning may no longer be valid that same afternoon.

If you drag your feet and tell the loan officer you’ll get back to them, even if just hours later, the rate may be ancient history.

Remember, if you want a guaranteed interest rate on your mortgage, you need to lock it in.

[Locking vs. floating your mortgage rate]

By locking, I mean speaking with your mortgage broker or loan officer, agreeing on certain terms, and getting lender confirmation in writing!

I can’t stress this enough; often times borrowers will be “promised” a certain interest rate or simply be told that interest rates are “X” and not to worry.

But when it comes time to close the loan, for whatever reason, interest rates may have gone up, and the promised rate is no longer available, often putting the borrower in a tough spot.

If rates increased, borrowers just bite the bullet and reluctantly agree to the current rate because they’re so far along in the loan process.

That’s why it is imperative to lock in your mortgage rate when you’re comfortable with it, and be sure to get it in writing and keep that document in a safe place!

Finally, be sure to take the time to compare rates and compare lenders too.

All too often, a borrower will just fill out a single mortgage application and call it a day. That’s fine if you don’t care about saving money, but my guess is you do care.

Take a moment to calculate the difference between two rates that are just an eighth or quarter apart using a mortgage calculator.

You might be shocked at the difference in interest over the life of the loan, which should illustrate the importance of putting in the time to shop mortgage interest rates.

Read more: What mortgage rate can I expect?

Source: thetruthaboutmortgage.com

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