The Wall Street Journal reported today that Bank of America is in advanced talks to acquire ailing mortgage lender Countrywide Financial.
According to the Journal, two people familiar with the matter said it may happen very soon, but noted that it’s also possible that any agreement could be delayed or fall apart altogether.
It is believed that an announcement regarding the matter will be made either late today or tomorrow morning.
In August, many believed Bank of America was gearing up to take over Countrywide after buying $2 billion in preferred shares convertible to about a 16% stake in the company.
But since then, Countrywide shares have fallen tremendously, briefly dipping to $4.43 Wednesday, an all-time low for the struggling Calabasas-based lender.
Shares of Countrywide rocketed shortly after the report was released, climbing $3.27, or 63.87%, to $8.39 in late afternoon trading on Wall Street, while Bank of America rose marginally.
Bank of America now holds 9.88% of the country’s deposits after its acquisition of LaSalle Bank in September, just below the federal limit which prohibits a bank from controlling more than 10% of U.S. deposits.
However, the law does not apply to federally chartered thrifts, one of which happens to be Countrywide Bank.
If successful, the deal would bring together the top U.S. mortgage lender with the second largest bank in the United States.
Nearly a year ago, the two financial giants met to discuss a possible alliance when Countrywide was trading around $42.
Bank of America declined to comment, as it doesn’t respond to rumors or speculation, while Countrywide representatives failed to respond to a request for a comment.
Shares of related companies surged as well, with IndyMac up over 16%, MGIC up 12%, Fannie up more than 6%, and Washington Mutual gaining more than 11%.
In similar news, Legg Mason revealed a 9.08 percent passive stake in Thornburg Mortgage, up from 4.35 percent, according to a previous SEC filing.
Updates: The New York Stock Exchange said it has contacted Countrywide, asking the company to make a statement regarding the unusual activity of its stock.
Analysts believe regulators would likely approve the takeover because a possible bankruptcy would further disrupt the market.
Countrywide CEO Angelo Mozilo could receive $36.4 million if the company were to be taken over, according to regulatory filings and compensation experts.
The deal looks like a go…and should be announced tomorrow. Sources say it’s an all-stock deal valued at just over $4 billion.
Rumors: There are some interesting rumors floating around regarding the takeover news.
Some say that the deal was facilitated by Washington, who couldn’t possibly let the top lender fail. Apparently the Countrywide bankruptcy rumors may have been true.
Others say there was another interested buyer, but Bank of America has the right of first refusal.
The much-anticipated Consumer Price Index (CPI) was released this week. For those seeking evidence that inflation will soon be back at the Fed’s target level, it wasn’t the triumph it might have been. Even so, rates managed to move lower.
Mortgage rates and, indeed, most rates are determined by trading levels in the bond market. Bond yields/rates move higher when inflation is high, and the market has been waiting on signs of lower inflation before trading in a way that allows interest rates to move lower.
The Consumer Price Index (CPI) is the biggest name in monthly inflation reports. It’s caused big reactions in rates many times over the past few years. In recent months, it’s been showing more and more promise regarding a return to inflation levels that would allow for significantly lower rates.
But CPI has given false hope before, so traders are wary. This week’s report definitely stopped short of providing resounding confirmation that inflation is defeated. That said, it didn’t send any signals that were too troubling either.
With that in mind, it’s not too surprising that rates actually didn’t move much in response to CPI. If anything, the initial impulse was toward slightly higher rates. It wasn’t until the following day’s Producer Price Index (PPI) that bond traders saw better evidence of calmer inflation. Both CPI and PPI have been moving lower, but PPI is now all the way back down to target levels.
The following chart shows how 10yr Treasury yields (which tend to correlation with mortgage rate movement) were reacting throughout the week:
Note the initially bad reaction to CPI. There was a recovery that same afternoon for a variety of potential reasons. At least one of those reasons had to do with speculation that the Fed is still on track to deliver a series of rate cuts this year in addition to making rate-friendly changes to the way it’s managing its bond portfolio. Fed policy expectations are even easier to see when we look at actual Fed Funds Rate expectations which are now at the lowest levels since July.
Mortgage rates don’t correlate perfectly with Fed Funds Rate expectations (one reason we often advise that a Fed rate cut/hike doesn’t mean a mortgage rate cut/hike). As such, they’re not back below the recent lows, but they definitely haven’t moved much higher. This week’s gentle descent means we’re continuing to hold a vast majority of the improvement seen in Nov/Dec.
Looking ahead, while next week doesn’t have any economic data on the same level as CPI, Wednesday’s Retail Sales report can definitely move the needle. It’s expected to improve slightly to 0.4% month over month after hitting 0.3% last time.
Beyond the data, we’ll hear from several Fed speakers and there’s been some speculation that Waller’s appearance at the Brookings Institute will bring some important concepts regarding the precursors for friendlier rate policy in 2024. That will happen on Tuesday, which is the first business day of the week next week due to the Martin Luther King Jr. holiday.
While not as much of a factor for interest rates, we’ll also get updates on several key housing metrics including new home construction, builder confidence, and Existing Home Sales.
Average mortgage rates fell moderately yesterday. That was a bit of a surprise (though a welcome one) because yesterday’s inflation report would normally have pushed them higher. Read on for why markets might have reacted unexpectedly.
Earlier this morning, markets were signaling that mortgage rates today might fall. But these early mini-trends often switch direction or speed as the hours pass — as we saw yesterday.
Current mortgage and refinance rates
Find your lowest rate. Start here
Program
Mortgage Rate
APR*
Change
Conventional 30-year fixed
7.015%
7.03%
-0.07
Conventional 15-year fixed
6.28%
6.31%
-0.1
Conventional 20-year fixed
6.91%
6.93%
-0.065
Conventional 10-year fixed
6.09%
6.125%
-0.14
30-year fixed FHA
5.875%
6.545%
-0.3
30-year fixed VA
5.99%
6.14%
-0.085
5/1 ARM Conventional
6.31%
7.56%
-0.005
Rates are provided by our partner network, and may not reflect the market. Your rate might be different. Click here for a personalized rate quote. See our rate assumptions See our rate assumptions here.
Should you lock your mortgage rate today?
Yesterday’s fall in mortgage rates showed markets continuing to have faith in a “soft landing,” which will occur if we continue to see falling inflation together with a resilient economy. Indeed, it suggests that faith can’t be shaken even by occasional unfriendly data.
I think a soft landing remains the most likely scenario for 2024.
So, my personal rate lock recommendations are:
LOCK if closing in 7 days
FLOAT if closing in 15 days
FLOAT if closing in 30 days
FLOAT if closing in 45 days
FLOATif closing in 60days
However, with so much uncertainty at the moment, your instincts could easily turn out to be as good as mine — or better. So let your gut and your own tolerance for risk help guide you.
>Related: 7 Tips to get the best refinance rate
Market data affecting today’s mortgage rates
Here’s a snapshot of the state of play this morning at about 9:50 a.m. (ET). The data are mostly compared with roughly the same time the business day before, so much of the movement will often have happened in the previous session. The numbers are:
The yield on 10-year Treasury notes tumbled to 3.93% from 4.04%. (Good for mortgage rates.) More than any other market, mortgage rates typically tend to follow these particular Treasury bond yields
Major stock indexes were rising this morning. (Bad for mortgage rates.) When investors buy shares, they’re often selling bonds, which pushes those prices down and increases yields and mortgage rates. The opposite may happen when indexes are lower. But this is an imperfect relationship
Oil prices increased to $74.42 from $72.80 a barrel. (Bad for mortgage rates*.) Energy prices play a prominent role in creating inflation and also point to future economic activity
Goldprices climbed to $2,065 from $2,036 an ounce. (Good for mortgage rates*.) It is generally better for rates when gold prices rise and worse when they fall. Gold tends to rise when investors worry about the economy.
CNN Business Fear & Greed index — inched lower to 73 from 75. (Good for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are often better than higher ones
*A movement of less than $20 on gold prices or 40 cents on oil ones is a change of 1% or less. So we only count meaningful differences as good or bad for mortgage rates.
Caveats about markets and rates
Before the pandemic, post-pandemic upheavals, and war in Ukraine, you could look at the above figures and make a pretty good guess about what would happen to mortgage rates that day. But that’s no longer the case. We still make daily calls. And are usually right. But our record for accuracy won’t achieve its former high levels until things settle down.
So, use markets only as a rough guide. Because they have to be exceptionally strong or weak to rely on them. But, with that caveat, mortgage rates today look likely to decrease. However, be aware that “intraday swings” (when rates change speed or direction during the day) are a common feature right now.
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What’s driving mortgage rates today?
Yesterday
I suspect that Wall Street has bought the narrative of a soft landing (see above) and, for now, is prepared to stick to it through thick and thin. That’s my only real explanation for why mortgage rates fell yesterday despite an unfriendly inflation report.
True, some saw the report as less unfriendly than others. The New York Times (paywall), for example, reported it under the headline, “Price Increases Tick Higher, but Show Moderation.”
But the consumer price index (CPI) was undeniably worse than expected. And that would normally exert some upward pressure on mortgage rates. Still, let’s not give this gift horse too close a dental inspection.
Today
Producer price indexes (PPIs) are typically less important than CPIs. But they still sometimes affect mortgage rates.
Today’s PPI showed factory-gate and wholesale prices rising more slowly than expected. And that would normally be good for mortgage rates. However, as we saw yesterday, markets don’t always follow such “rules.”
Next week
Rather like this week, next week starts slowly but contains an important economic report. Things are especially quiet on Monday because bond markets are closed for Martin Luther King Day. And closed bond markets mean mortgage rates shouldn’t move. (So, we shall not be publishing this daily report on Monday.)
Tuesday’s similarly dull with no economic reports scheduled for release.
However, Wednesday is potentially next week’s big day for mortgage rates, led by the retail sales report for December. But, after that, things tail off again.
Don’t forget you can always learn more about what’s driving mortgage rates in the most recent weekend edition of this daily report. These provide a more detailed analysis of what’s happening. They are published each Saturday morning soon after 10 a.m. (ET) and include a preview of the following week.
Recent trends
According to Freddie Mac’s archives, the weekly all-time lowest rate for 30-year, fixed-rate mortgages was set on Jan. 7, 2021, when it stood at 2.65%. The weekly all-time high was 18.63% on Sep. 10, 1981.
Freddie’s Jan. 11 report put that same weekly average at 6.66%, up from the previous week’s 6.62%. But note that Freddie’s data are almost always out of date by the time it announces its weekly figures.
Expert forecasts for mortgage rates
Looking further ahead, Fannie Mae and the Mortgage Bankers Association (MBA) each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.
And here are their rate forecasts for the last quarter (Q4/23) and the following three quarters (Q1/24, Q2/24 and Q3/24).
The numbers in the table below are for 30-year, fixed-rate mortgages. Fannie’s were updated on Dec. 19 and the MBA’s on Dec. 13.
Forecaster
Q4/23
Q1/24
Q2/24
Q3/24
Fannie Mae
7.4%
7.0%
6.8%
6.6%
MBA
7.4%
7.0%
6.6%
6.3%
Of course, given so many unknowables, both these forecasts might be even more speculative than usual. And their past record for accuracy hasn’t been wildly impressive.
Important notes on today’s mortgage rates
Here are some things you need to know:
Typically, mortgage rates go up when the economy’s doing well and down when it’s in trouble. But there are exceptions. Read ‘How mortgage rates are determined and why you should care’
Only “top-tier” borrowers (with stellar credit scores, big down payments, and very healthy finances) get the ultralow mortgage rates you’ll see advertised
Lenders vary. Yours may or may not follow the crowd when it comes to daily rate movements — though they all usually follow the broader trend over time
When daily rate changes are small, some lenders will adjust closing costs and leave their rate cards the same
Refinance rates are typically close to those for purchases.
A lot is going on at the moment. And nobody can claim to know with certainty what will happen to mortgage rates in the coming hours, days, weeks or months.
Find your lowest mortgage rate today
You should comparison shop widely, no matter what sort of mortgage you want. Federal regulator the Consumer Financial Protection Bureau found in May 2023:
“Mortgage borrowers are paying around $100 a month more depending on which lender they choose, for the same type of loan and the same consumer characteristics (such as credit score and down payment).”
In other words, over the lifetime of a 30-year loan, homebuyers who don’t bother to get quotes from multiple lenders risk losing an average of $36,000. What could you do with that sort of money?
Verify your new rate
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.
How your mortgage interest rate is determined
Mortgage and refinance rates vary a lot depending on each borrower’s unique situation.
Factors that determine your mortgage interest rate include:
Overall strength of the economy — A strong economy usually means higher rates, while a weaker one can push current mortgage rates down to promote borrowing
Lender capacity — When a lender is very busy, it will increase rates to deter new business and give its loan officers some breathing room
Property type (condo, single-family, town house, etc.) — A primary residence, meaning a home you plan to live in full time, will have a lower interest rate. Investment properties, second homes, and vacation homes have higher mortgage rates
Loan-to-value ratio (determined by your down payment) — Your loan-to-value ratio (LTV) compares your loan amount to the value of the home. A lower LTV, meaning a bigger down payment, gets you a lower mortgage rate
Debt-To-Income ratio — This number compares your total monthly debts to your pretax income. The more debt you currently have, the less room you’ll have in your budget for a mortgage payment
Loan term — Loans with a shorter term (like a 15-year mortgage) typically have lower rates than a 30-year loan term
Borrower’s credit score — Typically the higher your credit score is, the lower your mortgage rate, and vice versa
Mortgage discount points — Borrowers have the option to buy discount points or ‘mortgage points’ at closing. These let you pay money upfront to lower your interest rate
Remember, every mortgage lender weighs these factors a little differently.
To find the best rate for your situation, you’ll want to get personalized estimates from a few different lenders.
Verify your new rate. Start here
Are refinance rates the same as mortgage rates?
Rates for a home purchase and mortgage refinance are often similar.
However, some lenders will charge more for a refinance under certain circumstances.
Typically when rates fall, homeowners rush to refinance. They see an opportunity to lock in a lower rate and payment for the rest of their loan.
This creates a tidal wave of new work for mortgage lenders.
Unfortunately, some lenders don’t have the capacity or crew to process a large number of refinance loan applications.
In this case, a lender might raise its rates to deter new business and give loan officers time to process loans currently in the pipeline.
Also, cashing out equity can result in a higher rate when refinancing.
Cash-out refinances pose a greater risk for mortgage lenders, so they’re often priced higher than new home purchases and rate-term refinances.
Check your refinance rates today. Start here
How to get the lowest mortgage or refinance rate
Since rates can vary, always shop around when buying a house or refinancing a mortgage.
Comparison shopping can potentially save thousands, even tens of thousands of dollars over the life of your loan.
Here are a few tips to keep in mind:
1. Get multiple quotes
Many borrowers make the mistake of accepting the first mortgage or refinance offer they receive.
Some simply go with the bank they use for checking and savings since that can seem easiest.
However, your bank might not offer the best mortgage deal for you. And if you’re refinancing, your financial situation may have changed enough that your current lender is no longer your best bet.
So get multiple quotes from at least three different lenders to find the right one for you.
2. Compare Loan Estimates
When shopping for a mortgage or refinance, lenders will provide a Loan Estimate that breaks down important costs associated with the loan.
You’ll want to read these Loan Estimates carefully and compare costs and fees line-by-line, including:
Interest rate
Annual percentage rate (APR)
Monthly mortgage payment
Loan origination fees
Rate lock fees
Closing costs
Remember, the lowest interest rate isn’t always the best deal.
Annual percentage rate (APR) can help you compare the ‘real’ cost of two loans. It estimates your total yearly cost including interest and fees.
Also, pay close attention to your closing costs.
Some lenders may bring their rates down by charging more upfront via discount points. These can add thousands to your out-of-pocket costs.
3. Negotiate your mortgage rate
You can also negotiate your mortgage rate to get a better deal.
Let’s say you get loan estimates from two lenders. Lender A offers the better rate, but you prefer your loan terms from Lender B. Talk to Lender B and see if they can beat the former’s pricing.
You might be surprised to find that a lender is willing to give you a lower interest rate in order to keep your business.
And if they’re not, keep shopping — there’s a good chance someone will.
Fixed-rate mortgage vs. adjustable-rate mortgage: Which is right for you?
Mortgage borrowers can choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM).
Fixed-rate mortgages (FRMs) have interest rates that never change unless you decide to refinance. This results in predictable monthly payments and stability over the life of your loan.
Adjustable-rate loans have a low interest rate that’s fixed for a set number of years (typically five or seven). After the initial fixed-rate period, the interest rate adjusts every year based on market conditions.
With each rate adjustment, a borrower’s mortgage rate can either increase, decrease, or stay the same. These loans are unpredictable since monthly payments can change each year.
Adjustable-rate mortgages are fitting for borrowers who expect to move before their first rate adjustment, or who can afford a higher future payment.
In most other cases, a fixed-rate mortgage is typically the safer and better choice.
Remember, if rates drop sharply, you are free to refinance and lock in a lower rate and payment later on.
How your credit score affects your mortgage rate
You don’t need a high credit score to qualify for a home purchase or refinance, but your credit score will affect your rate.
This is because credit history determines risk level.
Historically speaking, borrowers with higher credit scores are less likely to default on their mortgages, so they qualify for lower rates.
For the best rate, aim for a credit score of 720 or higher.
Mortgage programs that don’t require a high score include:
Conventional home loans — minimum 620 credit score
FHA loans — minimum 500 credit score (with a 10% down payment) or 580 (with a 3.5% down payment)
VA loans — no minimum credit score, but 620 is common
USDA loans — minimum 640 credit score
Ideally, you want to check your credit report and score at least 6 months before applying for a mortgage. This gives you time to sort out any errors and make sure your score is as high as possible.
If you’re ready to apply now, it’s still worth checking so you have a good idea of what loan programs you might qualify for and how your score will affect your rate.
You can get your credit report from AnnualCreditReport.com and your score from MyFico.com.
How big of a down payment do I need?
Nowadays, mortgage programs don’t require the conventional 20 percent down.
In fact, first-time home buyers put only 6 percent down on average.
Down payment minimums vary depending on the loan program. For example:
Conventional home loans require a down payment between 3% and 5%
FHA loans require 3.5% down
VA and USDA loans allow zero down payment
Jumbo loans typically require at least 5% to 10% down
Keep in mind, a higher down payment reduces your risk as a borrower and helps you negotiate a better mortgage rate.
If you are able to make a 20 percent down payment, you can avoid paying for mortgage insurance.
This is an added cost paid by the borrower, which protects their lender in case of default or foreclosure.
But a big down payment is not required.
For many people, it makes sense to make a smaller down payment in order to buy a house sooner and start building home equity.
Verify your new rate. Start here
Choosing the right type of home loan
No two mortgage loans are alike, so it’s important to know your options and choose the right type of mortgage.
The five main types of mortgages include:
Fixed-rate mortgage (FRM)
Your interest rate remains the same over the life of the loan. This is a good option for borrowers who expect to live in their homes long-term.
The most popular loan option is the 30-year mortgage, but 15- and 20-year terms are also commonly available.
Adjustable-rate mortgage (ARM)
Adjustable-rate loans have a fixed interest rate for the first few years. Then, your mortgage rate resets every year.
Your rate and payment can rise or fall annually depending on how the broader interest rate trends.
ARMs are ideal for borrowers who expect to move prior to their first rate adjustment (usually in 5 or 7 years).
For those who plan to stay in their home long-term, a fixed-rate mortgage is typically recommended.
Jumbo mortgage
A jumbo loan is a mortgage that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac.
In 2023, the conforming loan limit is $726,200 in most areas.
Jumbo loans are perfect for borrowers who need a larger loan to purchase a high-priced property, especially in big cities with high real estate values.
FHA mortgage
A government loan backed by the Federal Housing Administration for low- to moderate-income borrowers. FHA loans feature low credit score and down payment requirements.
VA mortgage
A government loan backed by the Department of Veterans Affairs. To be eligible, you must be active-duty military, a veteran, a Reservist or National Guard service member, or an eligible spouse.
VA loans allow no down payment and have exceptionally low mortgage rates.
USDA mortgage
USDA loans are a government program backed by the U.S. Department of Agriculture. They offer a no-down-payment solution for borrowers who purchase real estate in an eligible rural area. To qualify, your income must be at or below the local median.
Bank statement loan
Borrowers can qualify for a mortgage without tax returns, using their personal or business bank account. This is an option for self-employed or seasonally-employed borrowers.
Portfolio/Non-QM loan
These are mortgages that lenders don’t sell on the secondary mortgage market. This gives lenders the flexibility to set their own guidelines.
Non-QM loans may have lower credit score requirements, or offer low-down-payment options without mortgage insurance.
Choosing the right mortgage lender
The lender or loan program that’s right for one person might not be right for another.
Explore your options and then pick a loan based on your credit score, down payment, and financial goals, as well as local home prices.
Whether you’re getting a mortgage for a home purchase or a refinance, always shop around and compare rates and terms.
Typically, it only takes a few hours to get quotes from multiple lenders — and it could save you thousands in the long run.
Time to make a move? Let us find the right mortgage for you
Current mortgage rates methodology
We receive current mortgage rates each day from a network of mortgage lenders that offer home purchase and refinance loans. Mortgage rates shown here are based on sample borrower profiles that vary by loan type. See our full loan assumptions here.
Last week, housing inventory grew and the number of price cuts fell, which is expected at this time of the year. I hope the next thing we see is housing inventory grow at the level it typically does in January or February instead of being delayed until March or April. Last year at this time, inventory rose week to week and I was hopeful for a typical spring inventory year, but the seasonal bottom didn’t actually happen until April 14. So let’s hope for more home sellers in 2024.
Weekly housing inventory data
Here is a look at the first week of the year:
Weekly inventory change (Jan. 5-12): Inventory rose from 499,143 to 505,223
Same week last year (Jan. 6-13): Inventory rose from 471,349 to 473,406
The inventory bottom for 2022 was 240,194
The inventory peak for 2023 is 569,898
For context, active listings for this week in 2015 were 931,002
I don’t want to jinx this because active inventory rose last year at this time. In any case, we will keep an eye on housing inventory going out in the future. As you can see, we are still a bit away from my ultimate goal of having total active listings back to 2019 levels.
Price cut percentage
Every year, one third of all homes take a price cut before they sell — there is nothing abnormal about that. However, this data line accelerates when mortgage rates rise and demand gets hit harder. A perfect example was 2022: when housing inventory rose, the percentage of price cuts rose and home sales crashed. This is not what we’re seeing now. Sales aren’t growing much, but they’re not crashing as they did in 2022 so we track this data line religiously every week to get clues.
This is the price-cut percentage for the same week over the last few years:
2024 32.2%
2023 35.8%
2022 21.7%
New listing data
New listings data can grow in 2024, something I talked about on CNBC last year as this data line didn’t trend much lower when mortgage rates were heading toward 8%. We took an affordability hit after July of 2022 and since most sellers are also buyers, it was too expensive to move, or you couldn’t qualify to sell to buy another house, directly impacting housing inventory.
Every year, wages grow and home-price growth has significantly slowed since the madness after COVID-19. We can grow new listings from these depressed levels and get more demand. While this isn’t the Silver Tsunami some have promised, any growth back to 2021-2022 levels is a plus.
2024 39,640
2023 36,804
2022 37,091
Mortgage rates and the 10-year yield
The 10-year yield is the key for housing in 2024. In my 2024 forecast, I have the 10-year yield range between 3.21%-4.25%, with a critical line in the sand at 3.37%. If the economic data stays firm, we shouldn’t break below 3.21%, but if the labor data gets weaker, that line in the sand — which I call the Gandalf line, as in “you shall not pass” — will be tested. This 10-year yield range means mortgage rates between 5.75%-7.25%. This assumes spreads are still bad.
Last week, even with the CPI and PPI inflation data, the 10-year yield stayed in a small range between 3.92%-4.07%. We have already moved lower in a big fashion from 5.04% to 3.80%; that 3.80% level is critical for now. Mortgage ranges have been calm as the spreads have been getting better. Mortgage rates started the week at 6.74%, reached as high as 6.80% and ended the week at 6.69%. We want to watch labor data and track if the spreads improve this year because mortgage rates should be 0.75% to 1.125% lower today but aren’t due to the spreads.
Next week, retail sales could be a driver of the 10-year yield, and therefore mortgage rates. Also, any Federal Reserve presidents talking about slowing down the quantitative tightening process would be a plus. This is something that they have been talking about recently.
Purchase application data
One of the things I have stressed over the years is that nobody should put any weight on the purchase application data during the last few weeks of the year because hardly anyone fills out a mortgage application during Christmas and New Years. And since the data takes a seasonal low dive, it tends to then bounce during the first week of the year, so we should ignore the first week of the year as well.
This is why I stress tracking purchase applications the second week of January to the first week of May. Volumes always tend to fall after May. With that said, purchase applications did have 6% week-to-week growth last week, but what was more encouraging to see is that when mortgage rates fell recently from 8% to almost 6.50%, we had six weeks of positive growth.
We can now officially start the seasonal housing period and the year-to-date counts on how many positive weeks we have versus negative weeks and where rates move. Remember that last year, even with mortgage rates ranging between 6%-8%, we had 23 positive and 24 negative prints and two flat prints for the year. Imagine a year with lower rates, and one where we don’t have a 2% increase in the calendar year. As you can see in the chart below, the bar is low for growth.
The week ahead: Housing week and CNBC
We have a ton of housing data coming up this week, including builders’ confidence, housing starts and the existing home sales report. Retail sales also come out this week, and that report might move the bond market early in the morning. And unless the schedule changes, I will be on CNBC on Thursday on the Exchange segment, talking about the housing starts data.
The key for 2024: track all economic data religiously to see its impact on the 10-year yield!
If you’re on the cusp of buying a home, one of the first and most significant considerations you’ll encounter is the down payment. This initial investment can influence not just your ability to purchase a home, but also the terms of your mortgage and your financial flexibility in the years to come. Understanding the ins and outs of down payments is more than a financial formality; it’s a critical step in making one of life’s biggest decisions.
In this guide, we explore the essential aspects of making a down payment on a house. From traditional norms to modern options, you’ll learn about the factors influencing down payment requirements and their implications. This article is designed to assist both first-time buyers and experienced investors in understanding the impact of various down payment sizes on the home buying process and their financial future.
The journey to homeownership is filled with important decisions. Our aim is to provide you with the insights needed to make informed choices, aligning your dream of owning a home with your financial objectives. Let’s delve into the importance of down payments and how they play a pivotal role in your home buying adventure.
What is a down payment on a house?
A mortgage is a loan used to purchase a house. But there are very few mortgages available that will cover the total cost of the home.
Instead, most mortgage lenders require that you pay a percentage of the home’s purchase price and finance the rest with a loan. The amount you pay upfront is called a down payment.
This provides the lender with the assurance that you are vested in the property. Otherwise, you may be more likely to default on the mortgage because you didn’t spend any of your own money on the house. Most people won’t miss their monthly mortgage payment and end up in foreclosure. However, lenders typically require it across the board.
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20% Down Payment
Traditionally, banks required individuals to have a 20% down payment on a house to qualify for a loan. But it wound up making homeownership extremely exclusionary.
After all, that amounts to $40,000 on a $200,000, and most people don’t have that kind of money lying around. So while 20% remains the standard down payment preferred by most lenders, it’s no longer the norm.
In fact, data shows that the average down payment amount is shrinking due to young first-time home buyers. But there are some benefits to saving up a larger down payment of 20% before buying a home, and they can add up to some pretty significant savings over time.
Even beyond financial reasons, putting in an offer letter with a 20% down payment with a conventional loan can make you a more attractive buyer when you’re competing for a specific house.
Why? Because it will give you a lower loan-to-value ratio (LTV.) Your loan looks less likely to fall through because you have a more substantial cash flow and assets than someone with a low down payment. All other things equal, a seller will probably select your offer in a competitive market.
Avoid Paying Private Mortgage Insurance
Another major perk of a large down payment? You avoid paying private mortgage insurance (PMI). Any mortgage for a home you own with less than 20% equity is subject to additional insurance to protect the bank.
The amount depends on your loan type, but it’s usually an annual amount divided out as part of your monthly payments. To get rid of the mortgage insurance, you typically have to refinance the loan, which can be costly.
You also get a better interest rate with a higher down payment. On top of that, having a smaller loan amount lowers your monthly mortgage payment, giving you more money left in your pocket each month.
Low Down Payment Mortgage Options
Most lenders these days don’t expect you to have a full 20% down payment saved up. How much down payment you’ll need for a house depends on the type of loan you choose. The exact amount you’ll need varies based on several factors.
Here’s a rundown of the most common types of mortgages and the down payment requirements for each one. Start here to begin your selection process. It’s also wise to ask potential lenders to provide different scenarios for each loan type you qualify for.
Conventional Loans
Even if you don’t have a 20% down payment, you can qualify for a conventional loan. The minimum down payment is 3%, although you can also do any amount higher than that.
On a $200,000 home, you would pay $6,000 with the minimum down payment. Until a few years ago, at least a 5% down payment was required.
However, Fannie Mae studies indicated that saving up that much money was creating an obstacle to homeownership for many creditworthy individuals. So they created a 97% loan-to-value option that lenders can offer to mortgage applicants.
2% may not seem like a huge difference, but it adds up quickly when dealing with such large dollar amounts. In the scenario above, a 5% down payment on the same house would require a $10,000 down payment — $4,000 more than the 3% option.
Conventional Mortgage Lender Requirements
To qualify for a conventional mortgage, you’ll need to meet certain lender requirements, which can be strict compared to other loan types. For example, credit score requirements generally start around 620, although some lenders may accept as low as 580.
You’ll receive a higher interest rate with both a lower credit score and a small down payment, another factor in determining how much to save for your home. Of course, as with any down payment under 20%, you will have to pay mortgage insurance.
The exact rate can vary, but here’s an example of how much it could cost you. If your loan amount is $194,000 (after your 3% down payment) and your annual mortgage insurance rate is 0.5%, you’d have to pay $970 each year. Split up over 12 monthly mortgage payments, your PMI would add just over $80 to your bill.
FHA Loans
An FHA loan is another option for a loan with a low down payment. FHA loans are backed by the Federal Housing Administration, and insured by the federal government. They allow you to qualify for a mortgage without as many restrictions as conventional loans.
With an FHA loan, you only need a 3.5% down payment. So on that same $200,000 house, you’d only need to supply $7,000 in upfront cash.
FHA Loan Lender Requirements
You also get to take advantage of lower credit score requirements, with the minimum at only 580. Plus, you can qualify with a higher debt-to-income ratio. Conventional lenders only allow 43% of your monthly income to go towards debt payments, including your mortgage.
On the other hand, an FHA lender might let that number creep up between 45% and 50%. So, this is another example of a couple of percentage points making a difference in how much home you can afford.
Mortgage Rates and Private Mortgage Insurance
Again, lower mortgage application standards, including a smaller down payment, typically result in higher costs elsewhere. As a result, you’re likely to see higher interest rates and a higher PMI. With an FHA loan, you’ll have to pay that PMI in two different ways.
The first is a one-time payment at closing. This amounts to 1.75% of your loan amount. Again, say that you’re taking out a $190,000 loan; part of your closing costs would include a $3,325 PMI payment. On top of that, you’ll pay about 0.85% annually.
In this example, that amounts to $1,615, adding $134 to your monthly mortgage payment. So making a low down payment can cost you when it comes to paying PMI each month! Still, it may be a better option, especially if you can quickly reach a 20% loan-to-value and refinance the home loan in a few years.
VA Loans
If you’re a military veteran or active military member, you can qualify for a loan backed by the VA. The great thing about this type of loan is that it doesn’t require any down payment at all.
It also has lower credit score requirements, and no mortgage insurance is required. You do, however, have to pay a one-time funding fee. It can either be paid at closing or rolled into your mortgage amount.
The fee amount varies depending on a few different factors, including your down payment amount, your type of service, and whether you’ve used a VA loan in the past. But if you are regular military personnel and a first-time user of the VA loan with a zero dollar down payment, your funding fee will total 2.15% of the loan amount.
For the sake of comparison, let’s look at the $190,000 loan again. In this scenario, your funding fee comes to $4,085. Since it’s just a one-time fee, the impact on your monthly payment would be fairly minimal since it’s spread out over 30 years.
USDA Loans
A USDA loan is backed by the U.S. Department of Agriculture and promotes homeownership in rural areas. But you don’t have to buy a farm to qualify for this loan type. In fact, many peripheral suburban areas are included.
The great thing is that there is no down payment required for a USDA loan. However, you must meet certain income requirements and may only earn a certain amount each year, which varies depending on where you live.
Like VA loans, USDA loans don’t require PMI, but you have to pay an upfront premium if your down payment is less than 20%. The premium amount is 2% of your loan amount. That would be $3,800 on a $190,000 loan.
Again, you can either pay it up front as part of your closing costs or roll it into your mortgage amount. Check out the eligibility map to see if any properties near you qualify for a USDA loan.
HomeReady Loans
Our final low down payment loan is the HomeReady loan. This loan helps potential homeowners in low-income areas to get the financing they need for a mortgage.
The required down payment on a house is just 3%, and your debt-to-income ratio can be as high as 50%. There’s no income limit, but the property does have to be located in a low-income census tract.
You also have to complete an online education program about homeownership. You will need to pay mortgage insurance with the minimum down payment. However, the program claims to offer lower premiums compared to other loans.
If you find a home you love in an approved area, it’s definitely worth comparing to other available options.
See also: How to Buy a House With No Down Payment
What other costs are associated with buying a home?
We’ve talked a lot about private mortgage insurance adding to the total cost of your loan. But it’s also important to remember that there are fees and expenses to consider.
Some you’ll have to pay upfront, while others are paid over the course of the loan. But, first, remember that your monthly payment includes not only principal and interest but also taxes and insurance.
PITI
Cumulatively, this is called PITI (principal, interest, taxes, and insurance), and those add-ons are often overlooked when using a mortgage calculator. City or county taxes are owed every year, but most lenders charge you monthly and then make the payment on your behalf.
Homeowners Insurance
Homeowners insurance is also required for a loan and can easily tack on an extra $300 to $1,000 per year, depending on the value of your home.
Closing Costs
You should also consider closing costs. Many buyers may try to negotiate that the seller covers these costs, but this tactic isn’t always successful, particularly in competitive real estate markets.
Closing costs cover various services and fees and usually amount to 3-5% of the home’s purchase price. So on that $200,000 home, you could end up paying between $6,000 and $10,000 in closing costs.
If you don’t have the cash up front, you can typically roll them into the loan, but you’ll end up with higher monthly payments. Don’t be afraid of closing costs or any other fees associated with a mortgage, especially if you don’t have much saved for a down payment.
Bottom Line
Understanding down payments is crucial in your home-buying journey. The ideal down payment for your new home hinges on your financial circumstances and the types of loans you’re considering. While a larger down payment can reduce long-term costs through lower interest rates and mortgage insurance, balancing this with your available savings and overall budget is key.
Remember to account for additional expenses like closing fees, taxes, and insurance. These play a significant role in the overall cost of purchasing a home. Utilizing tools like mortgage calculators can help you grasp the implications of different down payment amounts.
In the end, whether you choose a minimal down payment or aim for 20%, the most vital aspect is making an informed decision that suits your financial situation and long-term housing plans. Stay informed, seek guidance when needed, and confidently take this important step towards homeownership.
Frequently Asked Questions
What is the ideal credit score to qualify for a mortgage with a low down payment?
While the minimum credit score required for a mortgage can vary depending on the lender and the type of loan, generally, a score of 580 or higher is needed to qualify for more favorable low down payment options like FHA loans. Higher scores can secure better interest rates and terms.
How can I improve my credit score before applying for a mortgage?
Improving your credit score involves several steps: pay your bills on time, reduce your debt-to-income ratio, avoid opening new credit accounts before applying for a mortgage, and check your credit report for errors. Consistently managing these areas can gradually improve your score.
Are there any down payment assistance programs available?
Yes, there are various down payment assistance programs available, often based on location, income level, or first-time homebuyer status. These programs can offer grants, low-interest loans, and other forms of assistance. It’s advisable to research local and state programs for eligibility.
Can gift funds be used for a down payment?
Yes, many loan types allow the use of gift funds for down payments. However, there are specific rules regarding the source of these funds and documentation required. It’s important to discuss this with your lender to ensure compliance with their guidelines.
What is the difference between pre-qualification and pre-approval for a mortgage?
Pre-qualification is an initial step where a lender gives you an estimate of how much you might be able to borrow based on basic financial information you provide. Pre-approval is more comprehensive, involving a detailed review of your finances and a more concrete offer of loan amount and terms.
How long does the mortgage application process typically take?
The duration of the mortgage application process varies, but generally takes between 30 to 45 days from application to closing. This timeline can be influenced by the complexity of your financial situation, the type of loan, and the efficiency of your lender.
What happens if I make a down payment of less than 20%?
If you make a down payment of less than 20%, you’ll likely need to pay for Private Mortgage Insurance (PMI), which protects the lender in case of default. PMI is typically required until you have at least 20% equity in your home.
Can I withdraw from my retirement account for a down payment without penalty?
In some cases, you can withdraw funds from certain retirement accounts, like an IRA, for a down payment without incurring early withdrawal penalties, especially if you’re a first-time homebuyer. However, there are limits and tax implications to consider.
What are the risks of putting down a smaller down payment?
A smaller down payment on a house can mean larger monthly mortgage payments, higher interest rates, and the necessity to pay PMI. It may also affect your competitiveness as a buyer in a strong market.
How can I estimate my monthly mortgage payment?
Your monthly mortgage payment can be estimated using online mortgage calculators. These calculators take into account the loan amount, down payment, interest rate, and loan term, giving you a rough idea of what to expect.
As the snowflakes begin to dance in the Colorado sky, the allure of a cozy winter retreat home becomes irresistible. Nestled amidst the Rocky Mountains, Colorado offers a picturesque backdrop for those dreaming of a winter haven. Whether you’re envisioning weekends filled with skiing, sipping hot cocoa by the fireplace, or simply relishing the serene beauty of a winter wonderland, purchasing a winter retreat in Colorado can turn those dreams into reality.
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To help you navigate this exciting journey, we’ve compiled a list of 5 essential tips to consider when buying your cozy haven in the Centennial State.
Location, Location, Location
The quintessential factor in choosing your retreat is location. Colorado boasts a variety of settings, from bustling ski resort towns like Aspen and Vail to quieter, more secluded areas like Telluride and Steamboat Springs. Consider how close you want to be to ski resorts, and local amenities, and whether a remote, tranquil setting or a more lively, community-oriented area suits you better.
Understand the Climate and Terrain
Colorado’s winter can be both magical and harsh. Understanding the local climate and terrain is crucial. Elevated regions experience more substantial snowfall, affecting accessibility and necessitating enhanced winter maintenance. Take Aspen, for instance; during winter, temperature highs hover around 40°F, while summers bring milder temperatures, reaching or exceeding 70°F. Understanding these details guarantees your retreat is not just a sanctuary but a robust haven, prepared for Colorado’s diverse climate.
Inspect for Winter-Readiness
When inspecting potential properties, focus on elements that enhance your winter stay. Seek efficient heating systems, quality insulation, double-glazed windows, and a well-maintained roof. A fireplace not only adds aesthetic charm but also serves as a practical necessity.
Consider Accessibility
In your quest for a snug winter retreat in Colorado, prioritize accessibility, especially during the snowy months. Evaluate the property’s ease of access in heavy snowfalls, ensuring the road to your haven is well-maintained. Additionally, factor in the convenience of airports or major roads for frequent trips or anticipated visits.
Rental Potential
If you’re contemplating using your winter home on a seasonal basis, explore its potential for rental income. Properties in sought-after ski resort areas often present lucrative rental opportunities. Investigate local regulations and market demands to estimate the potential income from rentals. For instance, in Vail, the demand for winter accommodations is consistently high. Nestled within the majestic Colorado Rockies, Vail attracts winter enthusiasts from around the world seeking not only world-class skiing but also the charming ambiance of a mountain resort town.
Are you looking for a new home in Colorado? Give us a call today! One of our experienced real estate agents is more than happy to help you find the home that is right for you!
After attending college, you might have a hefty student loan you need to pay off, and you might also have some credit card debt you’re ready to eliminate.
Having two (or more) separate payments each month, as well as more than one interest rate, can get messy, and could negatively impact your credit if you don’t make all the minimum payments required. You may be wondering if it’s possible to consolidate student loans and credit card debt together to make things easier.
We’ll look at the differences between debt consolidation, debt refinancing, student loan consolidation, and student loan refinancing, plus explore your options to lower your interest rates and possibly get one single payment for all your student loan and credit card debts.
What Is Debt Consolidation?
There are two different ways you can change what your debt looks like: debt consolidation and debt refinancing.
It’s important to understand that when it comes to loans and credit cards, consolidating is different from refinancing. Refinancing refers to changing the financial terms of a debt. Maybe when you took out your student loan, for example, interest rates were higher than they are now. You might be able to refinance your loan with current, lower rates or you could refinance to extend the loan term.
Debt consolidation, on the other hand, refers to combining more than one debt into a new loan with a single payment. Maybe you have three different credit card balances and you take out a new loan to pay them off. Now, those three credit cards have a zero balance and you’re left with a single monthly payment and a new interest rate and terms with the new loan.
But is consolidating credit cards and student loans together possible? Or are they two different animals?
Consolidating Student Loans
The U.S. Department of Education offers what’s called a Direct Consolidation Loan, which consolidates all your federal education loans that qualify into one new loan with a single interest rate, typically the average of the loans you’re consolidating. When you consolidate federal student loans, you keep federal benefits, such as income-driven repayment plans and student loan forgiveness.
Student loan consolidation may be useful if you have federal loans from different lenders and are making more than one payment per month. However, your interest rate won’t necessarily be lowered, nor will you be allowed to consolidate private student loans or credit card debt.
So, what can you do if you have private student loans you want to consolidate or other loans that don’t qualify for the Direct Consolidation Loan? And what if you want to consolidate student loans and credit card debt together?
Before we get to the solution, let’s talk about consolidating credit cards. 💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
Consolidating Credit Cards
Just like with student loans, you may have multiple credit cards each with their own balance, interest rate, and minimum payment due each month. This can make paying off all this debt next to impossible and feel like you’re treading water as you pay the minimum amount due on each card.
With credit card consolidation, you take out a new personal loan and pay off all outstanding credit card debt. You then have one payment and one interest rate (which may often be significantly lower than some astronomically high rates for credit cards). You’re now making one monthly payment for all your credit card debt. Sounds good, right?
How to Consolidate Student Loans and Credit Card Debts
As discussed, with a Direct Consolidation Loan, you can’t add credit card debt to the consolidation loan. Direct Consolidation Loans are reserved for federal student loans only.
However, if you’re wanting to consolidate both student loans and credit card debts, there are options you can consider.
Personal Loan
One way to pay off different types of debt is with a personal loan. While personal loans may have higher interest rates than you’re paying for your student loans, the rates for personal loans may be significantly lower than credit card interest rates if your credit is good.
By taking out a personal loan, you may be able to pay off all of your student loans and credit card debt. Your debt is now rolled up into one monthly payment with one interest rate.
The higher your credit score, the lower the interest rate you may qualify for with a personal loan. But even if you don’t get a fantastic rate, you can extend the loan term to make your payments more manageable. And, of course, you can usually pay off a personal loan early without penalty, which can cut down on what you’d otherwise pay in interest.
Balance Transfer
If a personal loan isn’t for you, check to see if you have a credit card with a balance transfer offer. Often, credit cards will offer a promotion of 0% on any balances from other credit cards or loans transferred. Take note though: often these promotions end after a year, and then you’re stuck with the interest payment on the remaining balance.
A balance transfer makes sense if you know you can pay off your debts within a year. If you have a large amount of credit card debt or a high student loan, this may not be the best solution if you can’t pay it off quickly. Instead, you might consider transferring the amount of your debts that you know you can pay off within the timeframe.
Alternatives to Consolidation
If you’re hoping to consolidate student loans and credit card debt together, taking out a personal loan or using a transfer balance are two options to explore.
You might also look at a debt reduction strategy, such as the Avalanche Method or the Snowball Method.
The Avalanche Method
The Avalanche Method focuses on paying off your debts with the highest interest rates first. Once those are paid off, you put that money toward the debts with the next highest interest rates, and so on and so forth, until they are all paid off.
The Snowball Method
With the Snowball Method, you focus on the largest balance first. Put extra money toward paying that off, then when it’s paid off, move to the next largest balance.
Continue Payments
Whatever strategy you choose, the key is to keep making payments. And if possible, pay more than the minimum amount due. Even paying an additional $25 a month on a debt will help you pay it off faster and reduce the total amount of interest you pay overall.
Student Loan Refinance Tips from SoFi
Because student loans are often the largest debts people carry (even if they don’t have the highest interest rate), you may want to have a separate strategy for paying off your student loans.
When you refinance student loans, look for loans that offer a longer time period if you want a smaller monthly payment. However, keep in mind that with a longer loan term, you’re likely to pay more in interest over the life of the loan.
Also, if you plan on using federal benefits, it’s not recommended to refinance with a private lender. Instead, look into a Direct Consolidation Loan or refinance your student loans once you’re no longer using federal benefits. 💡 Quick Tip: When rates are low, refinancing student loans could make a lot of sense. How much could you save? Find out using our student loan refi calculator.
The Takeaway
While it may be challenging to consolidate student loans and credit card debt together, you may be able to do so with a personal loan or a credit card balance transfer. Using one of these methods allows you to transfer these debts into a single loan with a single payment and interest rate.
However, if a personal loan or balance transfer credit card isn’t an option, you could consider refinancing your student loans to possibly lower your interest rate and save money each month. The money you save could then be put toward paying off your credit card debt.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQ
Do I lose my credit cards if I consolidate?
Consolidating credit card debt does not cause you to lose your credit cards. It merely wipes out the debt on each card you include in the consolidation.
Will consolidating my student loans lower my credit score?
If you use the Direct Consolidation Loan, this will not impact your credit score. However, if you consolidate your student loans with a personal loan or through student loan refinancing, it may impact your credit.
Can my student loans be forgiven if I consolidate?
If you consolidate your loans with a Direct Consolidation Loan, you’re still eligible for student loan forgiveness. However, if you refinance your student loans with a private lender, you are no longer eligible for federal benefits, including loan forgiveness.
Photo credit: iStock/PeopleImages
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Student Loan Refinance If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
When people think of the most affordable neighborhoods in Chicago, they don’t always think being close to the lakefront is an option.
In Chicago, most of the pricier rent districts are those closer to the Loop. This means it’s entirely possible to find an apartment in Chicago that’s affordable, safe and close to plenty of nightlife and entertainment options for less than $2,000 a month.
Here are 10 of the most affordable neighborhoods in Chicago, depending on the type of amenities you like within your community.
Photo credit Megy Karydes
Logan Square’s identity has changed so much within the past 10 years. Once a sleepy neighborhood with a large immigrant population, this community is now teeming with young, hip Chicagoans that don’t want to pay top dollar for a home in the nearby neighborhoods of Wicker Park and Bucktown.
Logan Square is also still home to plenty of immigrant families who’ve been living in the neighborhood for years, giving it a true neighborhood feel. Rental rates here are quickly rising, but you can still get more space for your buck and be near the picturesque Logan and Kedzie boulevards.
Logan Square is serviced by Chicago’s Blue Line, giving residents easy access to all of the city’s neighborhoods. The Chicago Transit Authority (CTA) also services the area with a variety of bus routes, making transit a breeze. However, residents rarely need to leave the neighborhood unless they want to do so, as there are plenty of nightlife options, restaurants, shops and amenities within Logan Square.
Photo credit Megy Karydes
Just north of Logan Square and three stops away on the Blue Line is Irving Park. Much of this neighborhood’s charm lies in its beautiful homes and suburban-like setting.
Although it’s still distinctly urban, Irving Park has a much quieter feel than some adjacent areas. If you’re looking for pretty tree-lined streets, old houses and a community vibe, Irving Park is a good option to consider.
In addition to the area’s Blue Line and bus access, Irving Park offers direct access to Interstates 90 and 94, so those who need to drive to get to work will want to consider this convenient option. It’s also home to two Metra lines within Old Irving Park, making it even more convenient for those who want to live in the city sans car but not in the heart of the Loop.
Photo credit Megy Karydes
Avondale is having a moment right now. That said, while you can expect to spend more than $2,000 on rent in some parts of Avondale, you can absolutely find less pricey apartments that still make it among the cheapest neighborhoods in Chicago.
Newer businesses, including music venue/coffee bar Sleeping Village, bowling alley Avondale Bowl and newly-opened membership-based Guild Row, have welcomed those who want entertainment options without having to deal with the crowds or parking issues.
Photo courtesy of Choose Chicago
Like many neighborhoods throughout the city, gentrification is taking hold and causing rent to increase. Humboldt Park is no exception. You’ll know you’re in this West Side neighborhood when you pass under the large Puerto Rican flag metal sculpture or notice the large Humboldt Park swan boats in the park’s lagoon.
Today, you can hear a bunch of men congregating at the corner of the park, chatting and catching up on the day’s events while a young couple walks along the sidewalk with a stroller in tow.
Photo credit Megy Karydes
Pilsen is probably one of the most colorful neighborhoods in Chicago. Its bright and large wall murals can be found along the main streets but also within the neighborhood as single-family homes and apartment buildings use their walls as canvases.
Once a haven for artists seeking low rent and large loft spaces, the area has been slowly gentrifying. Renters have been attracted to its location, just a few miles from downtown, as well as lower rents than other parts of the city.
Pilsen also offers access to employment, entertainment and nightlife options throughout the South Loop, Little Italy, Chinatown and University Village (which is home to the University of Illinois at Chicago). It’s definitely one of the most affordable neighborhoods in Chicago near the Loop. Regardless of the influx of new residents, Pilsen is still home to a proud and rich Latino culture.
Photo credit Megy Karydes
Those looking to live on the north side of the city don’t have a ton of budget-friendly options, but Uptown is a great option for those who want to be close to neighborhoods like Lakeview, Wrigleyville and Andersonville without wanting to shell out a ton of cash.
Uptown’s locale is its main draw, as is its access to Lake Michigan and the northern areas of Lincoln Park (we mean the park, not the neighborhood of the same name).
7. New Chinatown
Photo courtesy of Choose Chicago
Many Chicago residents might refer to New Chinatown as basically the intersection of Argyle Street and Broadway Avenue, or “Asia on Argyle,” within the northern end of the Uptown neighborhood. Part of the Uptown community, “Argyle Street,” as the locals reference it, is home to some of the best pho and other Vietnamese cuisine in the city. Within a few blocks are dozens of Southeast Asian restaurants and businesses — mostly Vietnamese offerings, along with Chinese, Cambodian, Laotian and Thai.
On Thursday nights during the summer, Argyle Street hosts its popular Argyle Night Market, where you can sample food from local restaurants while enjoying live cultural and musical performances.
Photo courtesy of Chicago Park District
The childhood home of former First Lady Michelle Obama, South Shore offers easy access to Lake Michigan, Rainbow Beach and Stony Island Arts Bank — an art gallery, media archive, gorgeous library and community center.
Another perk is that it’s within walking distance to the South Shore Cultural Center, which includes a 65-acre park with a nine-hole golf course, tennis courts, culinary center, nature center and a variety of cultural programming and classes.
Photo courtesy of Choose Chicago
If living in a really diverse neighborhood appeals to you, complete with businesses that cater to a number of ethnic groups, Albany Park might be the perfect neighborhood for you — it’s also among the cheapest neighborhoods in Chicago.
It’s not uncommon to walk along Montrose Avenue, Lawrence Avenue or Kedzie Avenue, the main streets in Albany Park, and pass restaurants selling everything from freshly-made pitas (Sanabel Bakery on Kedzie Avenue) to sweets and Middle Eastern groceries and staples (Dukan International Food Market, right off the Kedzie Brown Line stop) or serving delicious food at restaurants such as Afghan Kabob on Montrose Avenue or Noon-o-Kabab on Kedzie Avenue.
Photo credit Megy Karydes
Rogers Park is another diverse neighborhood, not unlike Albany Park. According to Choose Chicago, more than 40 languages are spoken in this area. Large apartment complexes and three-flats can be found between single-family homes, and there’s a mix of established families with transient neighbors thanks to Loyola University’s campus. It’s also among the cheapest neighborhoods on Chicago’s far north side.
Affordable Chicago neighborhoods
If you’re new to Chicago and looking for the cheapest neighborhoods, take the time to do some research and talk to those who live in the areas you’re considering. There are many ways you can do that now without knocking on doors. Social media platforms often have neighborhood group pages where you can let people know you’re considering a move to the area and would love to know what they like or don’t like about their neighborhood. You’d be surprised how honest people are when talking about their communities.
Booking a flight used to be simple. Travelers had the option of booking a seat in either economy or first class. However, more recently, airlines like American Airlines have focused on “product segmentation” — adding in additional fare classes and cabins in an effort to maximize revenue.
Now, travelers have seemingly endless fare options when trying to book a flight. Should you book basic economy or “Main Cabin” — American Airlines’ new term for a standard economy ticket? And what the heck is Main Plus? Let’s dig into the American Airlines class codes, fare classes and more so you can make sense of it all.
American Airlines booking classes
American Airlines uses the following booking classes for revenue (non-award) fares:
Basic economy: B.
Main Cabin: O, Q, N, S, G, V, M, L, K, H, Y.
Premium economy: P, W.
Business class: I, R, D, C, J.
First class: A, F.
You’ll notice that there aren’t separate booking fare classes for Main Cabin Extra, Main Plus, Main Select or Flagship Business Plus as these are just add-on packages on top of the standard fare in that cabin.
American Airlines fare classes
At current count, American Airlines offers at least 11 different fare classes:
First class (domestic).
Main Select.
Main Plus.
Not every flight is going to have every one of these classes. For example, a domestic U.S. flight will typically offer first class, Main Cabin Extra and Main Cabin seating — with basic economy, Main Plus and maybe even Main Select fares sold on that flight.
Meanwhile, an international flight on American Airlines’ flagship Boeing 777-300ER will offer Flagship first class, Flagship business class, premium economy, Main Cabin Extra and Main Cabin seating — typically with basic economy, Main Plus, and sometimes Main Select fares sold in the Main Cabin and the option to buy Flagship Business Plus in business class.
American Airlines different classes of economy fares
Almost every American Airlines flight offers Main Cabin Extra, Main Cabin and basic economy fares. There are also two fare options — Main Plus and Main Select — that give you access to Main Cabin Extra seats and a few other perks.
So, let’s break down the differences between these American Airlines economy fare classes:
Fare Class
Basic economy
Main Cabin
Main Cabin Extra
Main Select
Changes allowed
Yes, with no fee.
Yes, with no fee.
Yes, with no fee.
Fully refundable.
Seat selection
For a fee.
Free for standard seats.
Complimentary for any extra-legroom seat.
Complimentary access to Main Cabin Extra and Preferred seats.
Complimentary access to Main Cabin Extra and Preferred seats.
Carry-on bag
1 personal item and 1 carry-on.
1 personal item and 1 carry-on.
1 personal item and 1 carry-on.
1 personal item and 1 carry-on.
1 personal item and 1 carry-on.
Boarding group (out of 9 groups)
Group 9 (Group 8 on certain international flights).
Group 7 and 8.
Alcoholic drinks
Available for purchase.
Available for purchase.
Complimentary beer, wine and spirits.
Complimentary beer, wine and spirits, when you select a Main Cabin Extra seat.
Complimentary beer, wine and spirits, when you select a Main Cabin Extra seat.
Eligible for upgrades
Base mileage earnings
2 miles per dollar.
5 miles per dollar.
5 miles per dollar.
5 miles per dollar.
5 miles per dollar.
Compared to other airlines — looking at you, United Airlines — American Airlines’ basic economy isn’t as punitive. Basic economy passengers still get a full-size carry-on bag, are able to purchase seats from the time of booking and AAdvantage elites are still eligible for upgrades to first class.
However, American Airlines passengers earn 60% fewer miles when booking a basic economy seat compared to a Main Cabin fare. Plus, you won’t be able to change your booking.
Purchasing a Main Cabin fare gets you a higher mileage earning rate, free changes (though a fare difference may apply), free seat selection and a slightly earlier boarding group. However, your seat and in-flight experience will be the same — unless you purchase a Main Cabin Extra seat.
Main Cabin Extra technically isn’t a different fare class. Instead, you score a couple of extra perks by purchasing a “Main Cabin Extra” extra-legroom seat — or selecting it for free if you have AAdvantage elite status. In addition to extra legroom, perks include an earlier boarding group and complimentary beer, wine and spirits. However, you still generally get the same seat type and service as Main Cabin.
Main Plus is essentially a fare class package that adds a free checked bag and Main Cabin Extra on top of a standard Main Cabin ticket.
Likewise, Main Select is a different type of fare package that makes your fare fully refundable, bumps you up to Group 4 priority boarding and lets you make confirmed flight changes the day of departure. However, you don’t get a free checked bag with this option.
Why do American Airlines class codes matter?
If you’re opting to earn AAdvantage miles on an American Airlines flight, your booking class generally doesn’t matter. If you booked basic economy, you’ll earn a base of 2 miles per eligible dollar spent. Otherwise, you’ll earn a base of 5 AAdvantage miles per dollar spent. And AAdvantage elites earn a bonus on top of those base earning rates.
However, your booking class matters if you booked a special fare (e.g. as part of a package), plan to apply a mileage upgrade or plan to credit your flight to another mileage program. In these cases, your American Airlines class codes will determine how many miles you earn or how much your upgrade will cost.
For instance, let’s take a flight from New York-John F. Kennedy to Los Angeles. Booking a $108 one-way basic economy fare will earn a base AAdvantage member 174 miles (2x the base fare of $87). If you book the flight as part of a package, it may code as a special fare and earn 248 miles (10% of the 2,475-mile distance). Or, you can credit this basic economy flight to British Airways to earn 619 Avios (25% of the 2,475-mile distance).
However, if you select the $153 Main Cabin fare instead, you’ll earn 645 AAdvantage miles (619 if booked as a special fare) or 619 Avios. Plus, you gain the ability to upgrade this fare to business class for 15,000 miles plus $75 — if there’s upgrade availability.
If you book at the last-minute or a flight is almost sold out, you’ll likely book into a higher American Airlines fare class. AAdvantage mileage earnings would still be calculated based on the cost, but you’ll earn additional miles when crediting to another mileage program.
How do I find my fare class on American Airlines?
When you’re shopping for a ticket on American, the fare classes are listed under “Details” under each departure time.
Click the “Details” button and a screen will pop up with class code info, broken out by ticket type.
For example, in the screenshot above, the flight from Chicago to Dallas has the following fare classes: B in basic economy, N in main cabin and I in first class.
American Airlines classes and fares recapped
American Airlines offers a large variety of fare classes and booking codes.
While the alphabet soup of booking fare codes has been a part of airlines for years, new American Airlines fare classes like Main Plus, Main Select and Flagship Business Plus add new complications when travelers are booking a flight.
However, knowing the differences between the fare classes and picking the right one can help you get the features you value most — whether that’s an extra legroom seat or higher mileage earnings.
(Top photo courtesy of American Airlines)
How to maximize your rewards
You want a travel credit card that prioritizes what’s important to you. Here are our picks for the best travel credit cards of 2024, including those best for:
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.
A credit limit is the maximum amount of money a person can currently borrow from a financial institution.
Credit cards and lines of credit let us borrow funds from banks, credit unions and various companies. Credit limits determine just how much money we can borrow without incurring penalties like overdraft fees. Americans tend to gradually increase their credit limits as they age; Experian® reported that the average credit card limit for Generation Z in 2022 was $11,290, while the average credit limit for Baby Boomers was $40,318 that same year.
“What is a credit limit?” may be such a common question because multiple factors can influence a person’s limit. We’ll explore this question and discuss how to increase your credit limit.
Key takeaways:
Financial institutions largely set credit limits based on a borrower’s credit history.
Credit utilization is based on your credit limit and your available credit.
Regularly practicing good credit habits can increase your limit
Table of contents:
How are credit card limits determined?
Your credit limit is determined by the institution you borrow money from, whether they’re a bank, a credit union or a government agency. Credit limits take several factors into account, including your income and credit score. People with higher credit scores and income are normally approved for higher credit limits because lenders view them as financially responsible people.
Annual revenue
When a borrower applies for credit or asks for a credit limit increase, lenders look at annual revenue. From their perspective, a borrower with more income is more likely to make their payments on time—and vice versa.
Credit score
Credit scores help us qualify for auto loans, mortgage interest rates and credit cards—plus the limits we’ll receive when approved. If you have good credit, then you’ll likely be eligible for high-limit credit cards from the get-go.
Debt-to-income ratio
Lenders can use your debt-to-income ratio to set your credit limit by weighing your monthly debt payments against your total income. A low debt-to-income ratio can prompt lenders to offer higher credit limits since your spending habits show you regularly make responsible financial choices.
Employment status
Your employment status can also affect your credit limit largely due to timing. If you apply for a credit card or ask for a limit increase while you’re seeking a job, you’ll most likely receive a lower limit than you would as a full-time employee.
Credit limit vs. available credit
A person’s credit limit and their available credit are heavily tied together, which can cause people to confuse these two terms. To clarify, your available credit refers to the amount of money you can still borrow after calculating your debt. On the other hand, your credit limit refers to the total amount of money that your lender lets you borrow.
For example, if you have a $10,000 credit limit and spend $5,000, you’ll still have another $5,000 in available credit that you can access during this billing cycle. Your credit utilization ratio is calculated by weighing your available credit against your total credit limit. In this case, your credit utilization would be 50 percent.
How does your credit limit affect your credit score?
Whenever you ask a lender to increase your credit limit, they’ll perform a hard inquiry to review your credit history and help inform their decision. Inquiries briefly cause your score to dip, which is why conventional wisdom recommends not attempting to increase your credit limit right before applying for something vital—like a home or a new car.
Credit limits can also affect your score if you consistently have a high utilization ratio. Credit cards with high limits typically help borrowers maintain lower utilization ratios, which is beneficial for credit health.
What happens if you go over your credit limit?
Exceeding your credit limit can have negative consequences, especially if you do so repeatedly. Some of the drawbacks you might encounter include:
Account review: A lender may review your longtime credit habits, which could potentially lead to a credit limit reduction.
Credit score changes: Credit utilization makes up 30 percent of your FICO® credit score. Repeatedly going over your credit limit could significantly hurt your credit.
Increased interest rates: Depending on your lender’s policies, they may issue a penalty APR on the offending account, which can be much higher than your standard rate.
Overdraft fees: Most lenders will charge a $35 overdraft (or over-the-limit fee) after a specified time period if you don’t pay off your balance.
How to increase your credit limit
If you consistently make your monthly payments on time and keep your utilization low, the credit card issuer may approve your request to increase your limit. But remember to allow six to 12 months before asking. Your issuer probably won’t raise your limit after just one or two months of opening the account or if you’ve been making late payments.
Some credit card issuers will actively increase your limit after they review your account history. Sometimes, they’ll ask you to update your income. If you’ve earned a raise recently, you can provide that information, and the lender may increase your limit. When an issuer reviews your account like this, it does not cause a hard inquiry because you didn’t ask for them to review the account.
Work on your credit with Lexington Law Firm
Credit cards are fantastic resources that can positively impact your life when used responsibly. Even if you get approved for a high credit limit, it’s best to monitor your spending and borrowing habits. Lexington Law Firm offers great services like credit education tools and credit report analysis that may help you with your credit.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Brittany Sifontes
Attorney
Prior to joining Lexington, Brittany practiced a mix of criminal law and family law.
Brittany began her legal career at the Maricopa County Public Defender’s Office, and then moved into private practice. Brittany represented clients with charges ranging from drug sales, to sexual related offenses, to homicides. Brittany appeared in several hundred criminal court hearings, including felony and misdemeanor trials, evidentiary hearings, and pretrial hearings. In addition to criminal cases, Brittany also represented persons and families in a variety of family court matters including dissolution of marriage, legal separation, child support, paternity, parenting time, legal decision-making (formerly “custody”), spousal maintenance, modifications and enforcement of existing orders, relocation, and orders of protection. As a result, Brittany has extensive courtroom experience. Brittany attended the University of Colorado at Boulder for her undergraduate degree and attended Arizona Summit Law School for her law degree. At Arizona Summit Law school, Brittany graduated Summa Cum Laude and ranked 11th in her graduating class.