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It’s Okay to Rent Until You Find a House You Really Like

When deciding between renting and buying, individuals often fret about missing out on home equity if they do the former.

In other words, for all those years they choose to rent instead of own, they’re not gaining any sort of ownership, and their money is simply being thrown out the window.

Of course, that rent money is providing shelter and a roof over their head, so it’s hard to say it’s all for nothing.

And while the argument has some truth to it, it’s often blown out of proportion. Or skewed in favor of buying as opposed to renting.

Imagine if someone bought a home and prices went down. Would they still be talking about throwing away money on rent?

Has the Housing Market Gotten Ahead of Itself?

  • When things start to feel bubbly prospective home buyers seem to get even more desperate
  • This can lead to bad decisions, especially when it comes to a major purchase
  • Make sure you’re buying a property for the right reasons and not throwing out your own rules
  • It should never be a rushed decision or one in which you make too many sacrifices

Lately, there’s been a lot of talk about bubbles and a potential housing market crash. But home prices have only surged due to a lack of inventory, not because of bad mortgages.

The low mortgage rates on offer have also made the housing market hot, perhaps too hot.

And after some really stellar home price gains, they’ve begun to moderate a bit, or at least decelerate.

Now there’s even talk that home prices could pull back in places where appreciation got a little ahead of itself. Or a lot ahead of itself, depending on how you look at it.

So is it possible to rent for a while during this period of uncertainty and still come out ahead? Let’s break it down.

Buy Now, Even If Prices Drop

Say home prices in the area where you want to buy are hovering around $250,000. You pull the trigger and get your offer accepted, pledging to put down 20%, or $50,000.

That leaves you with a loan amount of $200,000. Let’s also assume your mortgage interest rate is 3% on a 30-year fixed-rate mortgage.

Your monthly mortgage payment would be around $843, not including property taxes and homeowners insurance.

After five years of on-time payments, your loan balance would fall to around $177,813.

Put another way, you would have paid roughly $22,187 toward the principal balance, which is one of the great benefits of owning a home. The accrual of home equity! Wealth building!

But what if home prices fall in the next couple of years, even slightly. Would it actually be better to rent for a couple years and then buy a property at a marginally lower price?

Rent Now, Buy a Home Later?

  • It’s perfectly okay to rent instead of own until you find a home that suits you
  • You’re not necessarily “throwing money away” despite what people always say
  • You could actually be saving yourself money and headache by renting
  • It’s certainly less stressful to rent than own (though it can be well worth it to own!)

Now let’s consider a scenario where you hold off on buying until things settle down, assuming they do.

Say you decide to rent for $1,000 a month for two years (around the same cost of the mortgage sans taxes/insurance), spending $24,000 during that time and earning nothing in the way of home equity, not to mention any tax breaks.

After two years, you find a house for $237,500 and decide to put 20% down. That leaves you with a $190,000 loan amount and a mortgage payment around $800.

Let’s assume you go with the same loan program (30-year fixed) as our prior example and get the same interest rate (3%).

After three years of holding the mortgage, you would only pay $12,266 toward your principal balance, but in doing so it would drop to $177,734.

This would actually be slightly below the balance of the aforementioned mortgage at that time, which began two years earlier.

So after five years, two years renting plus three years owning, you’d be ahead of the person who decided to purchase a home right away at a higher price.

After 10 years, the early buyer would have a principal balance of $152,039, compared to $144,437 for the renter-turned-buyer.

If we consider the down payment, $50,000 on the $250,000 home purchase and $47,500 on the $237,500 purchase, the renter is even more ahead.

And the late buyer would enjoy a monthly mortgage payment around $50 lower thanks to that five percent home price drop initially.

If they were to make the same monthly payment as the early buyer by putting that extra $40 toward principal each month, they’d actually pay off their mortgage in about 27.5 years, or 29.5 years counting the two years when they rented.

It’s Not About Timing the Market, It’s About Not Rushing In

Of course, my little scenario above banks on mortgage rates staying in place and home prices dropping about five percent. If both go up, the equation changes quite a bit.

And that’s certainly not out of the question. I still believe this housing rally has a few more years left, and with mortgage rates near record lows, there’s mostly only way to go from here.

Still, it’s okay to rent if you can’t find a suitable home to purchase. You won’t necessarily miss out on anything. And you can always make slightly higher mortgage payments to play catch up if need be.

There might also be a better selection of homes in a year or two, once this housing frenzy settles down again.

By waiting, you’re actually not timing the market. You’re taking your time and being prudent as you would any multi-hundred-thousand or million-dollar purchase.

After all, those who rush in often make mistakes, and may also have regrets. But with market conditions so tough right now, I don’t blame anyone for whatever decision they make.

Lastly, let’s also remember that a home purchase is about more than money.

Source: thetruthaboutmortgage.com

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What the Names Zillow, Redfin, and Trulia Mean

Nowadays, just about everyone looking to buy or sell real estate begins their search online.

And a small handful of websites seem to be dominating the home buying space, including oddly-named real estate tech companies.

I use these websites all the time when researching real estate, but never actually knew the details behind their names. So here goes.

Zillow Is a Play on the Word Zillion

  • The name Zillow is a made up word that is a combination of existing words
  • It relates to the zillions of data points used to come up with their famous Zestimate
  • And also happens to rhyme with the word pillow, which appears to the emotional side of homeownership

First up is Seattle, Washington-based Zillow, which got its start by offering free house values using an algorithm.

Before they came along, it was hard to know what your home was worth without getting an appraisal done.

As for their unique name, it rhymes with popular words like willow and pillow. And while willow trees are certainly homey, the word pillow is actually part of the name.

They note that a home is more than just data; it’s also a place to lay one’s head, hence the word pillow.

But primarily, Zillow is a play on the zillions of data points the company digests to come up with home values (Zestimates).

The company was founded back in 2005, and since then has become a major player in both the real estate realm and the mortgage world.

They have since launched Zillow Home Loans and are also an iBuyer of homes via their Zillow Offers subsidiary.

The publicly traded company’s stock is currently valued at a whopping $23 billion. Well done Zillow, well done.

Redfin Is an Empty Vessel, Among Other Things

  • While the name might evoke images of birds or fish, it’s actually an anagram and an empty vessel
  • If you shuffle the words around you can make the word friend or finder
  • But it seems the company just liked how it looked and sounded

Another growing superpower in the real estate space is Redfin, which has an even stranger name.

While the name sounds like a fish, species of shark, or some other deadly predator, it’s actually an anagram.

Yep, jumble the letters around and you come up with words like “finder” and “friend.” Taken together, you’ve got a friend to help you find your perfect home.

Back in 2004, company founder David Eraker noted that the name Redfin was also a “great empty vessel.”

By that, he ostensibly meant a rather arbitrary yet memorable and unique name that would eventually win the hearts of everyday consumers.

After all, empty vessels make the most noise, so if anything, it’s a talking point that may spark some initial curiosity.

Redfin is big in the real estate game, with perhaps the most up-to-date listings and tools like the Price Whisperer, and the Redfin Estimate.

It’s also getting involved in the mortgage sphere via its Redfin Mortgage entity, and is an actual real estate brokerage, unlike the others.

Like Zillow, they also got into the iBuying craze after launching RedfinNow, pitting them against arguably their biggest rival in just about every space.

The company went public in 2017, and is currently worth about $5 billion, considerably less than Zillow.

Trulia Means Truth

  • This company’s name actually has a historical context
  • It’s based on an old-timey first or last name that means “truth”
  • All large companies want to exude this virtue to their loyal customer base

Last on the list of weird real estate company names is Trulia, which sounds more like someone’s name than it does a company.

In fact, it is (or was) a baby name, albeit a rare one back in the day. It apparently means “truthful” or “trustworthy,” something the company founders wanted to exude.

I’m pretty sure the name was around before the company was, perhaps as a surname and maybe randomly as a first name.

The San Francisco-based company was founded back in 2005, and acquired by Zillow in 2015 for $2.5 billion in stock.

They’re pretty similar to their parent company Zillow, though they’re also big on the rental business and specialize in unique insights about neighborhoods, not just the properties themselves.

(photo: Jack Dorsey)

Source: thetruthaboutmortgage.com

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What Is Lender-Paid Mortgage Insurance? First Of All, You Still Pay For It

Mortgage Q&A: “What is lender-paid mortgage insurance?”

Several years back, a rule went into effect that made mortgage insurance permanent on most FHA loans for the entire life of the loan. Ouch!

Before this game-changer, FHA loans were the cat’s meow because of the low mortgage rates offered, coupled with mortgage insurance premiums that were not only more affordable, but removed once the loan amortized to 78% LTV.

But in an effort to reduce losses, the FHA ended its so-called easy money policies and clamped down on borrowers taking advantage of a program originally intended for the underserved.

As a result, borrowers began giving conventional loans a lot more attention, seeing that private mortgage insurance (PMI) automatically terminates at 78% LTV.

Homeowners with these types of loans can also request PMI removal at 80% LTV (based on original amortization schedule) or even sooner if the home appreciates in value.

And even better, there’s a thing called “lender-paid mortgage insurance” on conventional loans where borrowers don’t have to pay for their own coverage!

That certainly sounds too good to be true, but there is a catch.

Lender-Paid Mortgage Insurance Isn’t Free

lender paid mortgage insurance

  • The phrase “lender-paid” is somewhat deceiving/confusing (it’s not free coverage)
  • Your mortgage lender isn’t doing you a favor out of the goodness of their heart
  • The borrower still pays for this insurance coverage, just not directly out-of-pocket
  • Instead the lender will pay the premium on your behalf, which should increase your mortgage rate

When you see the term lender-paid mortgage insurance, your first impression might be that the mortgage lender pays for it, and you don’t. Hooray!

The reality is that the lender does indeed pay for the mortgage insurance (on your behalf), but so do you, in the form of a higher mortgage rate.

So instead of securing an interest rate of say 3.75% on your 30-year fixed, you agree to a rate of 4% with no mortgage insurance costs paid out-of-pocket.

This is similar to a no cost refinance, where the lender pays all the closing costs, but you wind up with a higher interest rate.

Simply put, while it sounds like you’re getting something for free with lender-paid mortgage insurance, it’s more about how you pay for this coverage.

Lender-Paid vs. Borrower-Paid Mortgage Insurance

Now let’s look at lender-paid (LPMI) vs. borrower-paid mortgage insurance (BPMI) to see how they stack up in the real world.

This is just one example to illustrate the difference, so do your own math with real numbers if and when it comes time to make this important decision.

Loan amount = $100,000
Loan-to-value ratio (LTV) = 90%
Monthly MI premium = $52

Veterans may qualify for a $0 down VA loan

Option A (Borrower-Paid Mortgage Insurance):

30-year fixed @3.75%
Monthly mortgage payment = $463.12 + $52 = $515.12

Option B (Lender-Paid Mortgage Insurance):

30-year fixed @4%
Monthly mortgage payment = $477.42 + $0 = $477.42

As you can see, the option with lender-paid mortgage insurance is actually cheaper in terms of total monthly payment, despite a higher mortgage rate.

This is the beauty of a long mortgage term – you can absorb upfront costs quite easily by paying them monthly instead.

However, the borrower-paid option will eventually become cheaper once the monthly mortgage insurance premium no longer needs to be paid.

But that would only be the case if you keep your home loan long enough to see that benefit.

Tip: How long you plan to keep the mortgage matters a lot when it comes to deciding between LPMI and BPMI.

Advantages of Lender-Paid Mortgage Insurance

  • You don’t pay mortgage insurance directly (no out-of-pocket costs)
  • May equate to a lower total monthly housing payment
  • May qualify for a slightly larger loan amount
  • Higher tax deduction possible if you itemize

One of the biggest advantages of LPMI is that you don’t have to pay mortgage insurance premiums.

As we saw from the example above, this can equate to a lower monthly mortgage payment in some cases, which is generally a good thing.

Of course, if you go with borrower-paid mortgage insurance (BPMI), your monthly mortgage payment will be lower once the mortgage insurance is no longer required.

So LPMI is generally only a money-saver if you don’t plan to stay in your home that long, or if think you may refinance sooner rather than later.

[Homeowners move every six years on average.]

If you elect to go with LPMI, you may also be able to qualify for a larger loan amount (or be able to purchase a more expensive home), seeing that the monthly payment can be lower.

A lower payment means a lower DTI ratio, which means you can get more loan for your income. While it may not be a huge difference, if things are close, the LPMI option could come in handy.

Another pro for LPMI is that there is the potential for a larger tax deduction, seeing that you’re paying a higher interest rate each month.

It’s a bit counterintuitive, but it should still be mentioned – this was especially pertinent before mortgage insurance premiums became tax deductible in 2007.

Tip: For those who earn more than $100,000 annually, the deductibility of mortgage insurance begins to diminish after that point, making the argument for LPMI even stronger.

Disadvantages of Lender-Paid Mortgage Insurance

  • You can’t cancel LPMI since it is built into your mortgage rate
  • Your mortgage rate will be higher as a result (maybe around .25% higher)
  • You will pay more interest to the mortgage lender over the full loan term
  • It’s non-refundable because it is paid for by your lender upfront

The clear disadvantage to LPMI is that it cannot be canceled, ever. Kind of like the mortgage insurance on most FHA loans nowadays.

Because LPMI is built into the interest rate, the “cost” is there forever, or at least until you sell your home or refinance the loan.

You don’t get to call your lender once your LTV hits 80% and ask or a refund or a lower interest rate.

And even if your monthly payment is lower to start, it will eventually be higher than the BPMI option, as we saw in our example.

Additionally, you’re stuck with a higher interest rate for the life of the loan, which means more interest must be paid to the lender.

Using the $100,000 loan amount example, you’re looking at an additional $5,148 in interest paid over the full 30 years. On a larger loan, it’s an even more significant cost to consider.

If you hold your mortgage for the full term, you will likely pay more with the LPMI option, even with the tax deduction factored in. Of course, how many people do that these days?

So that’s that – be sure to compare all mortgage insurance options with your mortgage broker or loan officer to determine what’s best for your personal situation.

Don’t just assume one is better than the other without actually doing the math and laying out a plan.

Read more: FHA loan vs. conventional loan

Source: thetruthaboutmortgage.com

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6 Ways to Snag a Low Mortgage Rate Even If They Suddenly Jump Higher

Over the past year, mortgage rates have been relatively steady near their all-time lows.

This has continued to benefit existing homeowners who wish to refinance their mortgages. And has exacerbated an already too-hot housing market.

But there has been increasing talk of rate increases, with the Fed eyeing a possible taper to its bond buying program.

If they do announce such a plan, it could lead to an interest rate spike, especially if the economy improves and COVID gets under control.

Of course, the jobs report released last Friday was very poor, with blame being tied to the more infectious Delta variant.

In short, reopenings and tourism/hospitality have been struggling once again as more folks stay at home.

However, if and when that does change, you need to be prepared. I’ve compiled a list of ways to keep your mortgage rate down if we do see another taper tantrum and mortgage rate fiasco.

Just Buy It Down by Paying Points

  • Want an even lower mortgage rate than what’s being offered?
  • Simply pay discount points at closing and you’ll get one
  • This is a surefire way to get your hands on a discounted rate
  • It’ll cost you a little more upfront, but your monthly payment will be lower for the life of the loan

One tried and true method to push your mortgage rate lower is to buy down the rate. Simply put, you pay interest upfront in the way of discount points for a lower rate long-term.

Yes, your closing costs will be higher, but your rate will be lower for the duration of your mortgage term.

If 30-year fixed rates rise, you might be able to buy the rate back down below 3%. Just be warned that chasing a certain psychological threshold might not make good financial sense.

For example, it may cost an arm and a leg to get a rate below 3%, but very little to get the rate to 3.125% or 3.25%. And the difference in monthly payment could be negligible.

Lower Your LTV to Improve Pricing

  • Another trick is to come in with a larger down payment on a home purchase
  • Or pay down your mortgage balance a bit before refinancing
  • This could help you avoid some unnecessary pricing adjustments
  • Which means you’ll actually qualify or those low advertised interest rates

Another way you can bring that mortgage rate down is by lowering your loan-to-value ratio. This means either putting more money down on a home purchase or borrowing less for a refinance.

So instead of going with 10% down, maybe see what rates are like with a 20% down payment, assuming you can handle the cash outlay.

Or when refinancing a mortgage, maybe bring money to the table or avoid cash out to keep the interest rate at bay.

A lower LTV equates to fewer pricing adjustments, which means you can qualify for the lowest rates available with a given lender.

Improve Your Credit Before You Apply

  • Work on your credit scores months before applying for a home loan
  • Even simple things like paying down credit cards can help
  • Or simply avoiding new lines of credit in the lead up to your application
  • This will ensure you qualify for the lowest mortgage rates possible

While you’re at it, you might want to see if you can spruce up your credit. A low credit score will increase your mortgage rate, sometimes significantly.

If you’re able to improve your scores before applying for a mortgage, you should qualify for a lower interest rate.

Simple things you can do include paying down credit card balances and avoiding new lines of credit. Also avoiding new charges on your credit cards will help lower your credit utilization.

It might take some time for these moves to reflect in your scores, so take action early. But if you need the changes to apply immediately, ask your loan officer about a rapid rescore.

Go with an ARM Instead of the 30-Year Fixed

  • If fixed mortgage rates are too high check out alternatives
  • It’s OK to look beyond the default 30-year fixed-rate mortgage
  • There are hybrid ARMs that offer a fixed rate for 5-7 years or longer
  • These could be a good alternative if you don’t plan on staying in the property for long

There’s also the ARM option. If you feel fixed mortgage rates have risen too much, you can expand your horizons and look at adjustable-rate mortgages.

There are plenty of hybrid-ARM options that offer a fixed-rate period for five, seven, or even the first 10 years of the mortgage.

Most people move or refinance before that time anyway, so it’s worth at least considering an ARM if you can handle the potentially higher rate once it resets.

You will enjoy lower monthly payments during the initial fixed period and pay down the mortgage faster thanks to a lower rate.

When the rate is close to resetting, you can refinance again, sell the property, pay it off, etc.

Yes, there’s risk here, but it’s one option to at least consider.

Shop Your Mortgage Rate More

  • Here’s a no-brainer that most consumers fail to do
  • Just shop around at more than one bank or lender to improve your rate
  • Many borrowers obtain just one quote, which sounds cliché but is sadly true
  • Put in a little more time and you’ll increase your chances of saving money on your mortgage

If and when mortgage rates move higher, you’ll need to be a lot more picky when it comes to lender selection.

At the moment, you can’t really go wrong (to some extent). But if rates worsen, you better pay a lot more attention to what’s going on and shop accordingly.

Not all lenders react to the market the same way, so the spreads can widen significantly from mortgage company to mortgage company.

Some may have increased rates more than necessary out of an abundance of caution, while others may still be offering aggressive pricing to bring in customers and stay competitive.

It could pay to get a few quotes just to see what’s out there.

Just Wait It Out for Better

  • If mortgage rates aren’t favorable, wait for the trend to become your friend
  • Rates constantly change direction throughout the year as news happens
  • There are often periods of strength and weakness (don’t panic!)
  • Simply timing your application could be enough to get the rate you want

Lastly, you could just pump the brakes and wait for the dust to settle. We humans have a tendency to panic and buy when we should sell, and vice versa.

If the stock market tanks, folks often hit the “sell” button when it could actually be beneficial to buy at a discount.

Similarly, it might be prudent to wait if mortgage rates jump, as they often reverse course once news is digested.

There’s still plenty of uncertainty out there, and uncertain times usually call for volatility, which is often accompanied by lower interest rates.

This isn’t a sure thing, but it’s also not a sure thing that mortgage rates will continue to stay put at their low, low levels.

The good news is you always have options if things take a turn for the worse.

Read more: 21 Things That Can Make Your Mortgage Rate Higher

Veterans may qualify for a $0 down VA loan

Source: thetruthaboutmortgage.com

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Should You Drive Until You Qualify for a Mortgage?

In the mortgage/real estate world there’s a saying: “Drive until you qualify.”

It’s a cute way of saying if you can’t afford a home in a certain (desirable) area, hop on the highway and keep driving until home prices get more affordable.

This could mean driving an hour away from where you work, an obvious negative for someone who has to commute five days a week, especially if traffic is a bear.

This was common during the previous housing boom, with home builders often buying up cheap land in the outskirts of towns to construct their massive new tracts.

Because inventory was either non-existent, or simply out of price range, prospective home buyers would opt to buy in far-out places instead.

We’re beginning to see this phenomenon again thanks to dwindling inventory and higher and higher home prices.

It might explain why prospective buyers are beginning to look where they may not have initially looked for a home.

The difference today is that the work office environment has changed, partially due to COVID-19. In short, you might be able to work from home.

Homes Tends to Get Cheaper the Farther You Drive

  • There’s a good chance home prices are out of your budget in desirable areas
  • As such you might want to consider additional areas further outside your target zone
  • While sometimes frowned upon, the suburbs offer lots of advantages and are back en vogue
  • Benefits include more living space, outdoor features, and better schools (good for families)

The housing market is highly competitive at the moment. Anyone who has thought about buying a home knows that.

Today’s market consists of bidding wars, sky-high home prices, and lots of desperate home buyers. And despite some seasonal slowing, relief doesn’t appear near.

If you’ve been looking and it’s just not happening in your target area, you may want to broaden your search.

Not only are homes cheaper outside of city centers, they also tend to be newer, bigger, and sometimes nicer than the properties in the center of town.

Yes, location, location, location is still king in real estate, and always will be.

But while it can be fun to be closer to the action, the tradeoff might be a cheaper home with a lot more features. What’s not to like, other than the drive?

The Outskirts Can Get Hit Harder During a Downturn

One issue with the outskirts, other than the commute, is the potential for a big drop in property values.

It just so happens that new communities in the outskirts got hammered during the housing crisis because they often attracted the same type of buyer.

Someone who couldn’t afford a home in the city at peak prices and thus had to buy in the burbs or beyond, while still stretching their finances to qualify for a mortgage using the builder’s lender.

Before long, many homeowners in these tracts were underwater because they all bought at or near the height of the market, often with zero down financing and an adjustable-rate mortgage.

In other words, the crop of borrowers in these areas tends to be higher-risk compared with the more affluent borrowers living in the city.

So while that home in the exurbs may appear to be a bargain, there’s a reason aside from the location alone; the heightened risk during a downturn.

Major cities are insulated and constantly in demand, even if the economy takes a hit because many jobs are located in city centers.

It’s also more difficult to build new units. The same can’t be said about a random suburb that was only created to increase affordable housing inventory.

One should also factor in transportation costs to determine if it’s more affordable to buy outside of town. We all know gas isn’t cheap, even if it fluctuates in price.

Potential transportation costs (and perhaps opportunity cost while commuting) should factor in to the price you pay for a home.

The good news is electric vehicles are becoming more common as is remote work.

If You Have to Drive to Buy a Home, Should You Just Wait?

  • You might want to reconsider your home purchase if you can’t afford real estate at today’s prices
  • Sometimes it better to wait and get what you really want than settle and still pay a hefty price tag
  • There will always be ebbs and flows and opportunities in the future (prices won’t go up indefinitely)
  • And you won’t want to be stuck with a home in a faraway place you don’t even like

Let’s forget all the number crunching and just consider the climate at the moment.

If you have to drive to someplace you had no intention of living in, do you think it’s the right time to buy a home?

I’m not just referring to the suburbs vs. the city because there are plenty of great reasons to live in the burbs, as mentioned.

I’m referring to places further out than you intended, which were perhaps only brought to your attention by your real estate agent.

Are home prices maybe just a tad too high? Is it more beneficial to pump the brakes and keep renting where you enjoy living and wait for a better opportunity to get in?

As mentioned, home buyers got burned during the previous bust when they purchased homes in the outskirts.

I don’t see why it would be much different this time around, assuming there’s another major downturn.

This is especially if you’re buying out there for the same reason as everyone else, affordability.

It tells me home prices are getting a little too elevated, and many of your new neighbors will be in the same boat.

The silver lining is everyone will probably have a boring old fixed-rate mortgage, as opposed to a risky option arm, which could limit the damage.

But if you and the rest of your neighbors have a 3% down mortgage, it won’t take much for the first domino to fall.

Source: thetruthaboutmortgage.com

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Reasons Not To Refinance Your Home

Refinancing has become a popular decision for homeowners in 2020, as interest rates are at historic lows. You might hear about friends or family refinancing and wonder if you should be doing the same. 

While refinancing can be an effective way to reduce your mortgage interest rate or monthly payment, there are some situations in which refinancing might be a bad idea. If you’ve been considering it, you may want to keep these situations in mind and consider whether refinancing is really the right financial move for you.

In this article

Is refinancing worth it?

Refinancing your mortgage is the process of replacing your existing home loan with a new one. This new mortgage comes with a new interest rate and new payment terms, and often a new lender. You’re probably wondering why people do it.

When is it worth it to refinance your mortgage?

One of the most popular reasons to refinance is to reduce your mortgage interest rate. Rates in 2020 are historically low, and many people are taking advantage of this to lock in lower interest rates on their mortgages.

Someone might also refinance a mortgage to lower their monthly payments. If your financial situation has changed and your current mortgage payment has become unaffordable, refinancing and extending your loan term can reduce your monthly payment.

Other reasons to refinance might include removing PMI if you’ve increased your equity in your home, changing your loan type (switching from a variable to a fixed rate, or vice versa) or accessing some cash with a cash-out refinance.

[ Read: Best Refinance Rates ]

Reasons not to refinance 

Refinancing can be an effective way to save money over the life of your mortgage. But refinancing isn’t for everyone — there are some situations where it just doesn’t make sense.

Costs behind refinancing

Refinancing your mortgage comes with a lot of additional costs, both in the short-term and long-term. Refinancing won’t save you money right away. Because of the closing costs, it’ll likely take you years to break even. Plus, if you extend the life of your mortgage or refinance when you have little equity in the house, interest and private mortgage insurance can also be costly.

Closing costs

Just like with any other mortgage closing, you’ll have to pay closing costs to finalize your refinance. Closing costs can amount to between 2% and 5% of your loan amount on average — or from thousands to tens of thousands of dollars.

Typical closing costs include:

  • Loan application fee
  • Appraisal fee
  • Inspection fee
  • Origination fee
  • Attorney fees

Most of the time, closing costs are due at the time you sign the final loan documents. If you’re thinking of refinancing to put more money in your pocket, be aware that it could be years before you break even.

Long-term costs

In addition to the closing costs you’ll pay, there are other costs to refinance your mortgage as well. First, you may actually end up paying more in interest in the long-run. Let’s say you have a 30-year mortgage that you’re currently 15 years into repayments on. You’ve already paid a considerable amount in interest.

Now let’s say that you decide to refinance into a new 30-year mortgage. The lower refinance rate may not help you in that case because you’ve doubled the amount of time it’ll take you to finish paying off your mortgage.

Refinancing can also be costly when you have less than 20% equity in your home. In that case, you’ll likely have to pay private mortgage insurance (PMI), for many years, so it may be worth waiting until you have more equity in your home.

Your credit score needs improvement

Your credit score is going to be one of the most important factors in determining whether you can get a refinance loan. Even if you can qualify for a loan with a bad score, you probably won’t be eligible for the best interest rates. At that point, the refinance might not be worth it.

If your credit score needs some improvement, you’d probably be better served spending some time boosting your score. A few ways you can increase your credit score are to:

  • Make all of your monthly payments on time
  • Reduce your credit utilization, either by paying off debt or increasing your available credit
  • Find any dispute any errors on your credit report

You aren’t in it for the long run

Because of the additional costs, it can take years to break even on your refinance. If you aren’t planning to stay in the home long enough to enjoy the perks of the lower interest rate, then a refinance might not be the best option for you. 

Run some numbers and figure out how long you would have to stay in the house to save money — and then decide whether you can commit to staying for that long.

To figure out how long it’ll take you to break even on your refinance, divide your closing costs by your total monthly savings. You can also use a mortgage refinance break-even calculator to help you do the math.

Tips for refinancing

Are you considering refinancing your mortgage? Here are a few tips you’ll want to follow as you get started.

[ Read: How to Refinance Your Mortgage ]

Decide why you want to refinance.

Are you refinancing in the hopes of getting a lower interest rate? Or is your goal to lower your monthly payment? Go into the process knowing why you really want to refinance. That way, you’ll know exactly what type of loan offer you’ll need to make a refinance worth it.

Shop around for the best rates.

Between traditional banks, credit unions and online lenders, there are plenty of options available for mortgage lenders. Spend some time shopping around to make sure you get the best rate.

Pull your credit report beforehand.

The last thing you want is to apply for a refinance loan and find there’s an unwelcome surprise on your credit report that may prevent you from getting a good deal. Pull your credit report ahead of time so you know what to expect.

Do the math and decide if it’s worth it.

Depending on the type of deal you can get on your refinance, it’s not always worth it. While you may be able to get a lower interest rate, the other associated expenses may mean you’ll still pay more over time. Do the math to ensure that you’re accomplishing your ultimate goal with the refinance.

Compare top mortgage lenders

Too long, didn’t read?

Refinancing your mortgage can be an effective way to lower your monthly payments and save money. Every situation is unique, though, and there will be times where refinancing just isn’t worth it as a result of the additional costs. If you find yourself in one of the situations above, you may want to second-guess that refinance.

We welcome your feedback on this article. Contact us at thesimpledollar.com

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Do Mortgage Payments Go Down Over Time?

Mortgage Q&A: “Do mortgage payments decrease?”

While everyone always seems to focus on mortgage payments adjusting higher, there are a number of reasons why a mortgage payment may actually decrease over time.

No really, there are, so let’s take a look at how this pleasant surprise could happen, shall we…

Mortgage Payments Can Decrease on ARMs

  • While perhaps not as common as the payment going up
  • Monthly payments can drop if you have an adjustable-rate mortgage
  • But you’ll need the associated mortgage index to decline in the process
  • And your lender may have a built-in floor, so basically don’t bank on it

If you have an adjustable-rate mortgage, there’s a possibility the interest rate can adjust both up or down over time, though the chances of it going down are typically a lot lower.

Still, it is viable to take out an ARM, hold it throughout its initial fixed-rate period, then wind up with a lower rate once it becomes adjustable.

You may remember that now infamous interest rate reset chart, the one that showed billions of dollars worth of mortgages resetting from their fixed-rate period into their scary adjustable period.

Well, the damage wasn’t nearly as bad as it originally appeared because many of the mortgage indexes tied to those loans plummeted to rock-bottom levels and/or all-time lows.

As a result, some homeowners who stayed in those seemingly “exploding ARMs” may have actually seen their mortgage payments fall. And the savings could have been significant.

For example, say you took out a 5/1 ARM set at 3.5% for the first 60 months with a margin of 2.25% tied to the 12-month LIBOR.

After five years, the rate may have fallen to around 2.5% with the LIBOR index down to just 0.25%.

Yes, it is possible to lower your mortgage rate without refinancing!

When You Pay Down Your Mortgage (But It’s Not Automatic)

  • Payments can also go down if you make a large lump sum payment
  • But you’ll need to get your mortgage lender to recast your loan
  • Doing so will allow them to re-amortize it based on a lower outstanding balance coupled with your original loan term
  • Without a recast, extra payments won’t automatically lower future payments

If you decide to pay off a large chunk of your mortgage, you can ask the mortgage lender to recast your loan (if they allow it).

This essentially re-amortizes the mortgage so the new, smaller balance is broken down over the remaining months left on the loan.

Your monthly mortgage payment is adjusted lower to reflect the smaller outstanding principal balance, but your mortgage rate doesn’t change.

While this could increase household cash flow, you may be better suited to pay off your mortgage early by making your old, higher monthly payment despite the lower balance.

[Pay off the mortgage or invest instead?]

Keep in mind that mortgage payments won’t decrease automatically simply by making extra payments. All that will accomplish is a quicker payoff period and interest savings.

For example, if you pay an extra $500 per month on a $300,000 mortgage set at 4%, you’ll pay off the loan 11 years and 8 months early. But payments will be the same every month until the loan is paid in full.

In other words, future payments won’t go down to reflect earlier ones, but because the loan will be paid off sooner than scheduled, you will save more than $92,000 in interest over the life of the shortened loan.

Tip: A mortgage payment doesn’t decrease over time as it is paid off, like it might with a credit card or revolving account like a HELOC.

Instead, the monthly payment is pre-determined for the life of the loan using an amortization schedule, even if you chip away at it along the way.

If You Refinance Your Home Loan to a Lower Rate

  • This is the most common reason why mortgage payments drop
  • And largely why homeowners choose to refinance their mortgages
  • If interest rates are low and you’re looking for some payment relief
  • It might be time to trade in your old home loan for a new one via a refinance

Here’s a no-brainer. If you want a lower mortgage payment, look into a rate and term refinance.

Because mortgage rates are very low at the moment, your mortgage payment will probably decrease significantly if you refinance now, assuming you haven’t done so recently.

This is one of the most popular and easiest ways to lower your mortgage payment with minimal effort.

It just requires a little bit of work on your end in terms of shopping around, submitting a loan application, getting approved, and making it to the finish line.

For example, if your current interest rate is set at 4%, it might be possible to refinance it down to 3%, which depending on the loan amount could lower your payment significantly and save you a ton in interest too.

However, it’s not always a good time to refinance. Sometimes rates can be higher, and other times the closing costs might exceed the benefit, especially if you don’t plan to stay in the property for the long-haul.

[When to refinance a mortgage?]

If you’re not sure whether to refinance or not, consider the refinance rule of thumb argument.

Shop Your Homeowners Insurance, Look Into a Tax Reassessment

  • You can also look beyond your mortgage rate to gain payment relief
  • It might be possible to lower your payment by shopping around for homeowners insurance
  • Or getting a tax reassessment if you feel your property value has dropped
  • A simple escrow surplus can also result in a lower payment

Lastly, be sure to shop your homeowner’s insurance each year, as it is typically included in your mortgage payment.

If you can snag a lower home insurance premium, your mortgage payment may decrease as a result. Another pretty simple way to save money…

Assuming you didn’t waive escrows, your loan servicer will collect a portion of property taxes and homeowners insurance with each principal and interest payment, then pay these items on your behalf.

If either decrease from a year earlier, your total housing payment may go down as well after they run their annual escrow analysis.

Also look into a tax reassessment of your home if you feel it is overvalued.

If property values have been on the decline, you may be able to save some money on property taxes by asking your county recorder’s office to reassess your property.

Of course, it doesn’t always work out as planned so tread cautiously.

Remember, a mortgage payment is typically expressed as PITI, which stands for principal, interest, taxes, and insurance.

Take the time to address each component if you want to save money on your monthly housing costs.

See also: Do mortgage payments increase?

Source: thetruthaboutmortgage.com

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If You Want to Be a Homeowner, Go to College and Get a Degree

Assuming you want to become a homeowner, it’s probably best to go to college, even if you have to take out costly student loans in the process.

You may have read articles over the past several years that talk about snowballing student loan debt and the inability to afford a mortgage as a result.

While this might be true in some cases, it turns out you’re still more likely to buy a home if you obtain at least a bachelor’s degree.

The Benefits Outweigh the Costs

student loan homeowners

A commentary (since removed) from mortgage financier Fannie Mae revealed that those who go to college are more likely to become homeowners than those who simply graduate from high school.

The most probable homeowners are those with a college education and no student loans, with a likelihood of homeownership that is 43% higher than high school graduates without student loans.

Meanwhile, student loan holders with bachelor’s degrees are still 27% more likely to become homeowners relative to those debt-free high school graduates.

There is a catch though – if you don’t actually complete your bachelor’s degree and simply wind up with student loans, you’re actually worse off than those who simply called it quits after high school.

This last group is 32% less likely to own a home than a debt-free high school graduate. They’re also more likely to be behind on student loan payments, which isn’t very surprising.

The takeaway here is that it pays to go to college, even if it costs and arm and a leg.

The idea being that college grads get paid more and are eventually able to qualify for mortgages to purchase homes.

Don’t Be Discouraged If You Have Student Loans and Need a Mortgage

As noted, student loan debt has increased substantially in recent years and its effects may not yet be evident in the homeownership numbers.

Additionally, the majority of those surveyed by Fannie Mae had student loan debt that accounted for 10% or less of their monthly income. Others might not be so lucky.

If you have outstanding student loans, you can still get approved for a mortgage. It just might affect how much you can afford because it will be factored into your DTI ratio.

Many student loans are deferred to help recent graduates get up and running before they are gainfully employed. However, mortgage lenders know these individuals will eventually have to repay their loans.

As a result, lenders must still account for the student loan repayment when qualifying you for a mortgage to ensure your home loan is actually affordable.

Of course, it depends on the type of mortgage you apply for.

Fannie Mae Student Loan Guidelines

When it comes to Fannie Mae (conforming loans), if the student loan payment amount is listed on the credit report, it can be used for qualifying purposes. End of story.

If the payment isn’t listed on the credit report, or shows $0, or is deferred, different rules apply.

For those in an income-driven payment plan, and documentation shows the actual monthly payment is zero, the lender may qualify the borrower with a $0 payment.

For student loans that are deferred or in forbearance, a payment equal to 1% of the outstanding balance can be used to determine the monthly payment.

So if there’s a $25,000 student loan, $250 is added to your monthly liabilities to calculate your DTI, even if it’s lower than the actual fully-amortizing payment.

Lenders are also able to calculate a payment that will fully amortize the loan based on the documented loan repayment terms, which may result in a lower monthly liability.

While this may seem harsh, it used to be 2%, or $500 in our example above.

But Fannie determined that actual monthly payments were generally less than 2% of the total balance.

The old policy also required lenders to use the greater of the actual monthly payment or 1% of the balance, unless the payment was fully-amortized and not subject to any future adjustments. But this made no sense either.

Freddie Mac Student Loan Rules

If the student loan(s) is in repayment, deferment, or forbearance, Freddie Mac breaks it down into two options.

For loans with a monthly payment greater than zero, the actual payment amount found on the credit report or other file documentation can be used.

If the monthly payment amount reported on the credit report is $0, the lender must use 0.5% of the outstanding loan balance as the payment for qualifying purposes.

So using our same example from above, a $125 payment would be factored into your DTI to determine if you qualify.

This could make it easier to qualify for a Freddie Mac-backed mortgage versus a Fannie Mae loan.

Additionally, it might be possible to exclude the student loan payment from your DTI ratio if there are 10 or less monthly payments remaining.

FHA Student Loan Guidelines

HUD just announced new changes on June 18th, 2021 that may make it easier to qualify for an FHA loan if you have student loan debt.

Regardless of payment status, when the payment is above $0 the lender must use the payment amount reported on the credit report or the actual documented payment.

If the payment amount listed is zero, 0.5% of the outstanding loan balance is used to calculate the payment, similar to Freddie Mac.

So again, it’d be a payment of $125 using our example of $25,000 in debt.

Prior to this change, the FHA used 1% of the balance, so the $25,000 loan would have resulted in a $250 per month liability for your DTI ratio.

Obviously this can have a huge effect on what you can afford.  And apparently more than 80% of FHA-insured mortgages are for first-time home buyers.

Additionally, the FHA estimates that nearly half (45%) of these borrowers have student loan debt, with people of color the most impacted.

This explains the easing of the rule, and pales in comparison to the old requirement of 2% of the outstanding balance if no payment was found!

VA Student Loan Rules

When it comes to VA loans, student loan payments can be ignored if payments won’t begin for more than 12 months from loan closing.

This can be a huge advantage if your liabilities would push you over the allowable max DTI ratio.

But if student loan repayment has started or is scheduled to begin within 12 months from the date of the VA loan closing, the lender must count the actual or anticipated monthly payment.

They use a formula that calculates each loan at a rate of five percent of the outstanding balance divided by 12 (months).

So using our $25,000 example, it’d be $104.17. However, if a higher payment amount is listed on the credit report, such as $150, it must be used.

If the payment listed on the credit report is lower than the threshold payment calculation above, a statement from the student loan servicer that reflects the actual payment may be permitted.

USDA Student Loan Guidelines

For USDA loans, the actual student loan payment can be used if it’s fixed (and has a fixed term) without future payment adjustments.

If no payment is reported or it is deferred, 0.5% of the loan balance is used unless there is evidence that it’s a fixed payment.

Using our $25,000 example, it’d be $125, similar to the other loan types listed above.

If you’re close to maxing out with regard to DTI, an experienced mortgage broker or lender might be able to get you approved using a mortgage that has a more forgiving policy with regard to student loan debt.

Don’t give up until you consider several scenarios and exhaust all your options.

But also make sure you factor in any student loan debt early on in the mortgage discovery process so you don’t overlook this key qualification aspect.

A good rule of thumb might be to calculate your DTI using 1% of your student loan balance for the monthly payment, even if it turns out you can use a lower documented payment. This way you’ll still qualify in the worst-case scenario.

Also watch out for lender overlays that call for higher minimum monthly payments than the guidelines actually require.

Source: thetruthaboutmortgage.com

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3 Reasons Why Putting Less Down Can Raise Your Mortgage Payment

If you’re in the market to purchase a new home, perhaps because mortgage rates are low and you’re an extremely brave individual, you may be thinking low down payment all the way.

Heck, for many borrowers these days, a low down payment is the only way to play, with home prices surging to new all-time highs in record fashion.

In case you hadn’t heard, zero down mortgages are mostly extinct, other than VA loans and USDA loans.

But there are still other low-down payment options, such as the ever-popular FHA loan, which only requires 3.5% down, along with conventional mortgage options that call for just 3% down.

While these low-down payment mortgages can make homeownership more accessible, your mortgage payment will rise, which obviously erodes your affordability.

There are actually three ways a low down payment can increase your mortgage payment, which could even put your loan in jeopardy.

Let’s explore these issues to determine if putting down more money might be the better move.

Less Money Down = Larger Loan Amount

  • The most obvious downside to a lower down payment is a larger loan amount
  • The less you put down, the more you’ll need to borrow from the bank
  • This means paying more each month in the way of principal and interest
  • Pay extra attention to loan amount if it’s close to the conforming limit

First and foremost, if you put less money down on your home purchase, you’ll wind up with a larger mortgage. There’s really no way around it.

For example, if a home is listed for $500,000 and you put down 20%, your loan amount would be $400,000.

If you’re only able to come in with 3%, your loan amount is a significantly higher $485,000.

Simply put, a larger mortgage balance means a higher monthly mortgage payment. So the less you put down upfront, the more you pay each month.

That bigger loan amount also means you’ll pay a lot more interest over the life of the loan.

So this hurts two-fold. Both month-to-month in terms of potential payment stress, and over time via a lot more interest paid.

The upside might be less money trapped in your home, which could be put to use elsewhere for a higher return.

[What mortgage amount can I qualify for?]

More Risk Means a Higher Interest Rate to Compensate

  • Another issue with putting less down is a potentially higher interest rate
  • Lenders charge pricing adjustments that increase as the LTV ratio goes up
  • This could raise your mortgage rate a little or a lot depending on all the factors in play
  • Those with low credit scores could be impacted even more when coming in with a low down payment

Before you go with a low down payment mortgage, consider the mortgage rate impact of doing so.

If you decide to put down just 3-5%, your loan-to-value ratio (LTV) will be pretty high, and that means more risk to the issuing bank or lender.

To compensate for this increased default risk, you will likely be offered a higher interest rate on your mortgage.

Those rock-bottom rates you see advertised often require a 20%+ down payment, similar to how they assume you have an excellent credit score.

So if you don’t put down 20%, and instead opt for 5% or less, you’ll probably be stuck with an inferior mortgage rate.

How much worse will depend on the full loan scenario, including your FICO score, property type, occupancy, and so on.

For example, if the 30-year fixed is averaging 3% for top-tier loan scenarios, you might be offered an interest rate of 3.75%.

That higher interest rate will result in an increased mortgage payment, and more money paid out to the bank via interest.

This additional cost can add up significantly over the life of the loan as well.

And remember, it’s a one-two punch when you consider the larger loan amount coupled with the higher mortgage rate.

To add insult to injury, it could also affect outright eligibility in some cases if you’re debt-to-income ratio (DTI) is near the cutoff.

In other words, you may need to put down more to even get approved for a mortgage to begin with.

Mortgage Insurance Might Be Required

  • One final problem with low-down payment mortgages is the potential mortgage insurance requirement
  • This applies to most home loans where the down payment is less than 20%
  • This can greatly increase your overall housing payment depending on all risk factors
  • And is yet another added cost that can be avoided if you simply put down more money at closing

Finally, if you put down less than 20%, and don’t go with a piggyback second mortgage, you’ll likely be subject to paying mortgage insurance.

This applies to loans backed by Fannie Mae and Freddie Mac, which are the most common.

For FHA loans, this MIP requirement is unavoidable, even if you happen to come in with 20%+.

And note that this insurance protects lenders (not you) from the higher risk of default associated with a low-down payment mortgage.

It will be added on top of your monthly mortgage payment, so you’ll owe even more each month until you pay your loan balance down to 80% LTV (and ask that the insurance be removed).

The good news is it can be avoided by simply coming in with a 20% down payment and not taking out an FHA loan.

Let’s look at an example to put it all in perspective:

Home purchase price: $400,000

20% down: $80,000
$320,000 loan amount @3.75% (30-year fixed)
Monthly mortgage payment: $1481.97
Total interest paid: $213,509.20

5% down: $20,000
$380,000 loan amount @4.375% (30-year fixed)
Monthly mortgage payment: $1897.28
Total interest paid: $303,020.80

Assuming you went with a 30-year fixed mortgage, the 5% down option would result in a monthly mortgage payment more than $400 higher than the 20% down option (before mortgage insurance is even factored in).

Note the higher mortgage rate on the low-down payment loan.

And you’d pay nearly $90,000 more in interest over the life of the loan.

In other words, down payment matters. A lot.

Bonus: The amount you put down can also keep your loan out of the jumbo mortgage realm, which will often make it even cheaper mortgage rate-wise.

So consider that as well if you happen to be close to the conforming loan limit.

And as always, be sure to do plenty of homework and mortgage rate shopping.

If you take the time to gather multiple quotes and consider all scenarios, you may be able to get the best of both worlds, a low-down payment mortgage with a low interest rate.

Learn more by reading my primer on mortgage down payments.

Source: thetruthaboutmortgage.com

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Why It’s Best to Apply for a Mortgage When Things Are Slow

A working paper from the National Bureau of Economic Research revealed that it might be best to apply for a mortgage when no one else is.

The analysis, “The Time-Varying Price of Financial Intermediation in the Mortgage Market” (if you like light reading you should check it out), found that price changes on the secondary mortgage market aren’t fully passed on to consumers if volume is high.

In other words, if lenders are busy, they aren’t offering their lowest mortgage rates. In a sense, this is somewhat ironic, in an Alanis Morissette kind of way.

Savings Aren’t Passed Along When Demand Is Strong

  • When demand for a certain product, such as a home loan, is particularly strong
  • There is less (or no) incentive for lenders to pass along even more savings
  • This is similar to how retailers won’t lower prices if they’ve got plenty of buyers
  • Why should they if they’re already slammed?

The researchers refer to this cost as “intermediation,” which they define as the middleman between the borrower and the purchaser of the loan (the investor), essentially the lender.

This intermediary buys the mortgage from the borrower and then sells it to an investor. They provide the principal balance to the borrower and offer a rebate, otherwise known as a lender credit.

The rebate can cover closing costs associated with the loan so the borrower doesn’t have to pay them out of pocket.

Conversely, the borrower can take less or none of this rebate (or even a negative rebate) and instead go with a lower mortgage rate to save money over time.

Higher Rates on Days When Mortgage Applications Are Up

In any case, there is a rebate associated with each mortgage rate on a mortgage ratesheet that spells out whether the loan will provide the borrower with funds to cover their costs, or instead cost them at closing.

What the researchers found out was that mortgage lenders were passing along less of this money to borrowers on days when mortgage applications were high.

For example, on the day before QE1 on March 24th, 2008, there were only 35,000 daily mortgage applications, which is historically quite low.

As such, there was plenty of capacity to take on new mortgages, and thus when mortgage rates moved lower most of the improved cost was sent along to borrowers.

In other words, because volume had been so low, mortgage lenders were more eager to lure in customers, so they passed along more of the rebate to prospective customers.

Your Mortgage Rate Might Be Higher If Demand Is Also High

  • Mortgage rates might be higher if demand for home loans is also elevated
  • Ultimately lenders have limited capacity to deal with an influx of applications
  • And as noted, less incentive to lower interest rates if they’re already receiving a ton of business
  • It might be worth your while to pay attention to the MBA’s weekly mortgage application index

When QE1 was later expanded on March 18, 2009, the number of daily applications went from 60,000 the previous day to 100,000 following the announcement. This time, the pass-through to borrowers was lower because lenders already had their hands full.

This also tells us that there are diminishing returns to monetary policy. If the Fed kept trying to stimulate the mortgage market, lenders would have to pump the brakes to ensure they had the capacity to underwrite the loans and do their job.

There also just isn’t much incentive to keep lowering prices (rates) if demand is super high. What’s the point if the phone is already ringing off the hook?

Lenders also don’t like to bring on more staff for short-lived events, especially if rates rise and demand cools off in a short period of time, which it did on several occasions over the past few years.

Mortgage rates are highly volatile, and can change from day to day and even daily.

Maybe There Could Have Been a 2% 30-Year Fixed Earlier

  • During the mortgage boom years between 2009 and 2014, mortgage rates hit record lows
  • But is it possible they could have been even lower at that time?
  • Low enough that some lucky homeowners may have received 30-year fixed rates in the 2% range?
  • Rates have since drifted to record lows but it seems they’re often held back

The researchers also found that the price of intermediation rose steadily from 2009 to 2014, a price increase that amounted to 30 basis points per year.

They pinned the rise on a decrease in the valuation of mortgage servicing rights, thanks to higher legal and regulatory costs, and revised capital requirements.

This, along with the sensitivity to loan volume, resulted in a total cost of roughly $135 billion to borrowers over that time period.

Put another way, when mortgage rates hit record lows, it’s possible they could have been even lower had lenders actually passed on more of the price improvements from the secondary market, which they typically do.

Instead, they kept more for themselves, either for profit and/or to address the lower value of mortgage servicing rights.

That meant borrowers could have potentially received a 30-year fixed in the high 2% range when rates bottomed, instead of say 3.25%.

What Time of Year Is Best to Apply for a Mortgage?

That brings us to the next logical question. Is there a better and worse time to apply for a mortgage throughout the year?

This isn’t totally clear. Ultimately, mortgage rates ebb and flow and can be driven by completely unique events each year.

For example, no one probably foresaw COVID-19 tanking mortgage rates. However, I did do my own research and found that mortgage rates are lowest in December.

And guess what? They’re highest in April, which just so happens to be the traditional peak of the home buying season!

It turns out those sneaky lenders might be on to something…

So maybe, just maybe, you’re better off applying for a mortgage when no one else. Aside from perhaps getting a better deal, you could also receive more attention and close your loan a lot quicker.

Source: thetruthaboutmortgage.com