SALT LAKE CITY (KUTV) — After a major speech, many believe the U.S. Federal Reserve may press pause on hiking interest rates, but some fear that risks a resurgence of inflation.
When the fed raises rates it works to put downward pressure on inflation but also can cause higher mortgage rates and a weaker job market.
On Thursday, the Chairman of the Federal Reserve spoke ahead of a coming meeting that will decide if rate hikes will continue through the end of 2023.
During the speech, the stock market dipped and rose in reaction to what he said.
Earlier in the week one of feds board members said a wait and see approach is best right now.
Today it appeared that Chairman Jerome Powell might agree as he said, “Given the uncertainties and risks, and how far we have come, the Committee is proceeding carefully. We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”
Powell didn’t outright say the fed won’t raise rates, but still many analysts have taken that as a likely message from Powell’s address.
If that is true, it may mean mortgage rates are unlikely to rise much higher through the end of the year.
The nation’s largest home builder, D.R. Horton, also has its own affiliated mortgage lender known as “DHI Mortgage.”
Recently, new home sales have surged in popularity due to the mortgage rate lock-in effect.
Essentially, existing homeowners aren’t selling their properties because they’ve got ultra-low fixed interest rates on their home loans.
At the same time, mortgage rates have surged higher, resulting in big financing incentives from home builders to move their newly-built home inventory.
Let’s take a hard look at what DHI Mortgage has to offer and whether an in-house lender is the way to go.
DHI Mortgage Fast Facts
Full service mortgage lender offering home purchase loans and refis
Founded in 1997, headquartered in Austin, Texas
Parent company D.R. Horton is the nation’s largest home builder
Publicly traded company (NYSE: DHI)
Also operate DHI Title and D.R. Horton Home Insurance Agency
Aim to be a one-stop shop for newly-built home buyers
Funded roughly $20 billion in home loans during 2022
Most active in the states of Texas, Florida, and California
Licensed to do business in 34 states
DHI Mortgage is a full-service mortgage lender owned by parent company D.R. Horton.
They were founded in 1997 and are headquartered in Austin, Texas.
D.R. Horton is the largest home builder in the United States, slightly bigger than competitor Lennar, which also has a captive mortgage company called Lennar Mortgage.
The home builder got its start back in 1978 when Don R. Horton built his first home in Fort Worth, Texas.
Since then, the company has grown into a near-$35 billion dollar company that is publicly-traded on the New York Stock Exchange (NYSE: DHI).
The company’s shares are owned by legendary investor Warren Buffett, who sees strength in home building given the lack of existing home supply.
Aside from operating their in-house mortgage lender DHI Mortgage, they also run an affiliated title company and insurance agency.
This means home shoppers can use DHI Title for their title insurance needs and D.R. Horton Home Insurance Agency for their homeowners insurance, assuming it’s competitively priced.
The goal is to create a one-stop shopping experience for home buyers and streamline what is often a daunting process.
Last year, they funded about $20 billion in homes, with nearly 30% of overall volume coming their home state of Texas, per HMDA data.
They are also quite active in Florida, California, Arizona, Georgia, Nevada, and The Carolinas.
How to Apply with DHI Mortgage
While you can get pre-qualified for a mortgage online via the DHI Mortgage website, they say to get in touch with your mortgage loan originator to submit a full loan application.
It’s unclear if this means you can still apply electronically after speaking with a loan officer, or if you have to apply in-person.
They do have branch locations and sales offices at their home builder developments, which could facilitate this process.
Unfortunately, their website is a bit limited when it comes to information, so you’ll probably need to speak with a human before proceeding to an application.
Their online system, powered by fintech company Blend, does seem to allow for online refinance applications along with the pre-qualifications.
If you visit their website, it’s also possible to search for a local loan originator by state, branch, or by name.
They say they have digital options for buyers, but don’t make clear what those are. My assumption is they do offer some sort of online loan submission process.
And likely the ability to complete tasks electronically, whether it’s satisfying loan conditions or checking loan status.
However, I would like to see more information in this department.
Loan Programs Offered by DHI Mortgage
Home purchase loans
Refinance loans
Conventional loans including Fannie/Freddie 3% down
FHA loans
VA loans
USDA loans
Fixed-rate and adjustable-rate options
Temporary buydowns
Affordable housing loans
DHI Mortgage offers the most popular loan options out there, whether it’s 3% down conforming loan backed by Fannie Mae or Freddie Mac or an FHA loan.
You can get both a home purchase loan or a mortgage refinance, though I doubt many existing homeowners would use them for a refinance unless mortgage rates were ultra-competitive.
The full menu of government-backed mortgages is offered, including FHA loans, VA loans, and USDA loans.
And both fixed-rate and adjustable-rate options are available, including the 30-year fixed, 15-year fixed, 7/1 ARM, and 5/1 ARM.
They also appear to offer jumbo loans that exceed the conforming loan limit in pricier regions of the country.
However, they don’t appear to offer any second mortgages, such as HELOCs or home equity loans.
But temporary buydowns, such as 2-1 buydown, are offered, as well as other affordable housing loans if buying in specific locations or with low-to-moderate income.
DHI Mortgage Rates
Speaking of mortgage rates, DHI Mortgage doesn’t have a page on their website dedicated to rates or lender fees for that matter.
So you’ll be a little bit in the dark there. Be sure to ask your loan originator what fees they charge, such as loan origination fees, application fees, processing and underwriting, etc.
The good news is I did see special interest rate offers on the D.R. Horton website, which is typical of home builders.
They often offer special incentives to their home buyers who also use their affiliated lender.
In this case, I saw a 5.50% fixed rate FHA loan offer, which was also available on VA and USDA loans.
And a 5.75% fixed rate conventional loan offer that only required a five percent down payment.
So chances are they can offer some pretty competitive rates if you buy a D.R. Horton property and use DHI Mortgage.
DHI Mortgage Home Buyers Club
Those with imperfect credit can take advantage of the “DHI Mortgage Home Buyers Club.”
It pairs in-house credit consultants with prospective home buyers to prepare them for homeownership.
While it doesn’t guarantee loan approval or improved credit scores, they will work with you to boost your overall credit profile.
They’ll also ask you to complete a HUD-approved homebuyer education course while your credit consultant comes up with a credit profile improvement strategy.
This might entail removing inaccurate items on your credit report, paying down high balances, and getting current on any past due accounts.
The goal is to clean up your credit history and improve chances of mortgage approval, and potentially snag a lower mortgage rate depending on credit score improvement.
DHI Mortgage Reviews
As always, I try to track down customer reviews online to see what past customers think of the lender in question.
And they don’t appear to be great, based on what I could find. Their headquarters in Austin has a 2.6/5 rating from about 40 Google reviews.
Over at WalletHub, it’s a similar 2.6/5 rating from just over 30 reviews, with some customers citing poor communication and delays.
You can also find reviews for individual loan officers if you go on Zillow and search by name or location.
DHI Mortgage currently has a ‘B+’ rating with the Better Business Bureau (BBB), which isn’t fantastic and likely due to customer complaints.
They also have a 1.14/5 rating on the BBB website based on customer reviews.
To sum things up, their website could do with improving and their mixed reviews raise some questions about customer service.
On the bright side, they offer a good amount of loan programs and might have financing specials that beat out the competition.
Ultimately, it would probably come down to price if deciding between them and a different lender.
Though I assume most DHI Mortgage customers are also likely D.R. Horton home buyers, so there will likely be a big push to stay in-house.
Just be sure to speak with other mortgage companies, independent mortgage brokers, and so on to weigh your options.
Convenience is great, but not at the price of higher closing costs and/or interest rates. So definitely shop around.
Lastly, note that DHI Mortgage sells most of the loans it originates, meaning it’s likely your loan will be sold and transferred to a new loan servicer shortly after closing.
DHI Mortgage Pros and Cons
The Good
Special financing incentives to D.R. Horton home buyers
Might be a quicker/easier home buying process using affiliated companies
Branch locations allow borrowers to work with in-person if preferred
DHI Mortgage Home Buyers Club helps credit challenged buyers
Free mortgage calculator and homebuyer education resources online
Lots of loan programs to choose from including fixed-rate loans and ARMs
The Perhaps Not
Only licensed in 34 states
No mention of mortgage rates or lender fees online
Clunky website with limited information
Don’t seem to able to apply for a home loan electronically
Do not offer second mortgages or home equity products
An initial public offering, or IPO, represents the first time a company makes its shares available for public trading. A pre-IPO placement involves the sale of unregistered shares in a company before they’re listed on a stock exchange for the first time.
A pre-IPO placement usually occurs immediately before a company goes public.
Companies typically sell pre-IPO shares to hedge funds, private equity firms and other institutional investors that can purchase them in large quantities. It’s possible, however, to get involved in pre-IPO investing as an individual retail investor.
Investing in IPOs or pre-IPO stock could be profitable, if the company’s public offering lives up to or exceeds market expectations. But it’s also risky, since you never know how a stock will perform in the future.
How Does Pre-IPO Placement Work?
An IPO, or initial public offering, is an opportunity for private companies to introduce their stock to the market for the first time. A typical IPO requires a lengthy process, as there are numerous regulatory guidelines that companies must meet.
Once those hurdles are cleared, however, the company will have a date on which it goes public. Investors can then purchase shares of the company through the stock exchange where it lists.
Pre-IPO investing works a little differently. The end goal is still to have the company go public. But before that, the company sells blocks of shares privately, based on its IPO valuation. A successful pre-IPO gives the company attention, as well as capital from investors ahead of the actual IPO date.
For the most part, pre-IPO shares are restricted to high-net-worth investors, or accredited investors, i.e. those who can afford to invest large amounts of capital, and can afford to take on a certain amount of risk. A pre-IPO placement of shares could be made without a prospectus or even a guarantee that the IPO will occur.
Individual investors typically don’t have the funds required, or the stomach for that level of risk.
In return for that measure of uncertainty Pre-IPO investors get in on the ground floor and purchase shares before they’re available to the market at large. There may also be an added incentive. Because they’re buying such large blocks of shares, pre-IPO investors may get access to them for less than the projected IPO price. 💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.
An Example of Pre-IPO Placement
Pre-IPO placements have gained popularity over the last decade, with more companies opting to offer them ahead of going public. Some of the companies that have offered pre-IPO stock include Uber and Alibaba, both of which have ties to e-commerce.
Alibaba’s pre-IPO offering was notable due to the fact that a single investor and portfolio manager purchased a large block of shares. The investor, Ozi Amanat, purchased $35 million worth of pre-IPO stock at a price that was below $60 per share.
He then distributed those shares among a select group of families. By the end of the first public trading day, Alibaba’s shares had risen to $90 each. Alibaba’s IPO delivered a 48% return to those pre-IPO shareholders due to higher-than-expected demand for the company’s stock.
In Uber’s case, PayPal agreed to purchase $500 million worth of the company’s common stock ahead of its IPO. PayPal then lost a large portion of its investment when the Uber stock price fell by about 30% following its IPO.
Pros and Cons of Pre-IPO Placement
There are benefits to pre-IPOs placements, but there are also some important drawbacks that investors should understand.
Pros of Pre-IPO Placement
From the perspective of the company, pre-IPO offerings can be advantageous if they help the company to raise much-needed capital ahead of the IPO. Offering private placements of shares before going public can help attract interest to the IPO itself, which could help make it more successful.
For investors, the benefits include:
• Access to shares of a company before the public.
• The potential ability to purchase shares of pre-IPO stock at a discount. So if a company’s IPO price is expected to be $30 a share, pre-IPO investors may be able to purchase it for $25 instead. This already gives them an edge over investors who may be purchasing shares the day the IPO launches.
• Purchasing shares at a discount can potentially translate to higher returns overall if the IPO meets or exceeds initial expectations. The higher the company’s stock price rises following the IPO, the more profits you could pocket by selling those shares later.
Recommended: How to Find Upcoming IPO Stocks Before Listing Day
Cons of Pre-IPO Placement
While pre-IPO investing could be lucrative, there are some potential backs to consider. Specifically, there are certain risks involved that could make it a less attractive option for investors.
• The company’s IPO may not meet the expectations that have been set for it. That doesn’t mean a company won’t be successful later. Facebook, for example, is noteworthy for having an IPO described as a “belly flop”. A disappointing showing on the day a company goes public for the first time could shake investor confidence in the stock and bode ill for its future performance. That in turn could affect the returns realized from an investment in pre-IPO stock.
• The company may never follow through on its IPO and fails to go public. In that case, investors may be left wondering what to do with the shares they hold through a pre-IPO private placement. WeWork is an example of this in action. In 2019, the workspace-sharing company announced that it had scrapped its plans for an IPO, thanks to limited interest from investors and concerns over the sustainability of its business model. In 2021, the company did go public — but not through an Initial Public Offering. Instead, WeWork went public through a merger with a special acquisition company or SPAC.
• Pre-IPOs are less regulated than regular IPOs.
💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
Summary of Pros and Cons of Pre-IPO Placement
Here’s a quick look at the benefits and drawbacks of pre-IPO placements:
Pre-IPO Private Placement Pros and Cons
Pros
Cons
• Investors have an opportunity to get into an investment ahead of the crowd
• Pre-IPO investors may be able to purchase shares at a price that’s below the IPO price
• Purchasing pre-IPO stock could yield higher returns if the IPO is successful
• Pre-IPO placements can be risky, as they’re less regulated than regular IPOs
• There are no guarantees that an IPO will deliver the type of returns investors expect
• Does not guarantee you’ll get the loan
How to Buy Pre-IPO Stock
Typically, only accredited investors can purchase pre-IPO placements. As of 2021, the Securities and Exchange Commission defines an accredited investor as anyone who:
• Earned income over $200,000 (or $300,000 if married) in each of the prior two years and reasonably expects to earn that same amount in the current year, OR
• Has a net worth over $1 million, either by themselves or with a spouse, excluding the value of their primary residence, OR
• Holds a Series 7, 65 or 82 license in good standing
If you meet these conditions for accredited investor status, then you may be able to purchase shares of pre-IPO stock through your brokerage account. Your brokerage will have to offer this service and not all of them do.
Other options for buying pre-IPO stock include purchasing it from the company directly. To do that, you may need to have a larger amount of capital at the ready. So if you’re not already an angel investor or venture capitalist, this option might be off the table.
You could also pursue pre-IPO placements indirectly by investing in companies that routinely purchase pre-IPO shares. For example, you might invest in a mutual fund or exchange-traded fund that specializes in private equity or late-stage companies preparing to go public. You won’t get the direct benefits of owning pre-IPO stock but you can still get exposure to them in your portfolio this way.
The Takeaway
For some high-net-worth or institutional investors, buying pre-IPO shares — a private sale of shares before a company’s initial public offering — might be possible. But it’s highly risky. For the most part, individual investors won’t have access to these kinds of private deals. But eligible investors may be able to trade ordinary IPO shares through their brokerage.
Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it’s wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.
Invest with as little as $5 with a SoFi Active Investing account.
Photo credit: iStock/filadendron
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures. 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.
Buying a home is one of the most expensive purchases you’re bound to make in your life. That’s why it’s so important to get the right mortgage before you sign on the dotted line.
A few differences in mortgage rates or other terms can equate to tens of thousands of dollars either spent or saved. But with so many options available on the market, it’s hard to know where to start.
There are traditional lenders and online mortgage lenders, local ones and large multinational ones. Plus, many lenders specialize in different types of loans.
To get started, browse some of the best mortgage lenders and find a few that match your needs.
Best Mortgage Lenders & Online Loan Marketplaces of 2023
You have several great options available, from online lenders to brick and mortar branches, from excellent credit to bad credit lenders. Check out the complete list of lenders to find the best choice for your next home loan.
loanDepot
Offering home loans in all 50 states, loanDepot works with a wide range of borrowers. The minimum credit score for most loans is 620. However, some government-insured programs may allow your credit score to be as low as 580.
You also have access to various mortgage options. They provide fixed and adjustable-rate mortgages, jumbo mortgages, FHA loans, VA loans, and home equity loans.
If you want to talk over these choices, you’ll appreciate the online lender’s no steering policy. That means your loan officer doesn’t receive any incentive to point you in any one specific direction, so you can trust the advice you get.
Do keep an eye on your origination fees. Depending on your application, those could cost you anywhere between 1% and 5% of your home’s purchase price.
The first step of applying for a mortgage is talking to a loan officer. However, the application process occurs online. That means you can do the bulk of the work at your convenience.
Read our full review of loanDepot
LendingTree
LendingTree is the best if you want to compare multiple offers as they partner with the largest network of lenders who compete for your business.
You can get up to five different loan offers within minutes of submitting your application. If you’ve already found the place you want to call home, start here.
Another great feature is that you can submit a request online for conventional, FHA, or VA loans. LendingTree’s website also provides many in-depth resources for first-time buyers, regardless of where you are in the process.
They provide tips for qualifying for a mortgage, mistakes to avoid when purchasing a house, and a bank of frequently asked questions. For home loan guidance and receiving multiple offers at once, LendingTree is the place to go.
Read our full review of LendingTree
Rocket Mortgage
Rocket Mortgage is a great pick if you prefer applying for a mortgage online and has excellent customer service when needed.
Rocket Mortgage provides FHA loans, USDA loans, and Freddie Mac and Fannie Mae loan products that come with down payments as low as 3%.
A branch of Quicken Loans, Rocket Mortgage’s online application process is highly streamlined with an approval time of just a few minutes. You can also avoid the hassle of paperwork by using a secured platform to share your financial information.
Once you have your proposed interest rate, you can test out different house prices and down payment amounts to create a customized monthly payment. Once you get a contract on your new home, closing is easy and takes place at a location of your choice.
Read our full review of Rocket Mortgage
New American Funding
New American Funding offers conventional, FHA, and VA loans. You can also explore options for a mortgage that includes a home renovation loan.
Less common available loans include jumbo loans, reverse mortgages, and interest-only mortgages.
New American Funding also has first-time homebuyer loan programs available and works with down payment assistance programs in 14 states, including California, Illinois, Florida, and Texas.
Once you have an idea of what you’re looking for, go step-by-step through their questionnaire to get more details on potential loan terms you could qualify for.
Read our full review of New American Funding
Alliant Credit Union
Alliant Credit Union offers both fixed and adjustable-rate mortgages, and you can qualify with a down payment as low as 3% of the home price.
On a $200,000 house, that equates to just $6,000 needed in cash for your down payment.
You can qualify anywhere in the country and enjoy a low origination fee of just $995. If having cash on hand is an issue for you when purchasing a home, check out Alliant to see how they stack up to other mortgage lenders.
Alliant also offers home equity lines of credit.
Read our full review of Alliant Credit Union
Guaranteed Rate
Guaranteed Rate originated about $24 billion in mortgages for 2018, which is no surprise. The website allows you to get an idea of your qualifying interest rates easily.
All you need to do is input just a few details about your estimated credit score and the type of home you’d like to buy.
You can then browse several loan options to see your interest rates and APR options. It’s easy to compare mortgage options to get an idea of which kind of mortgage is best for you.
You can also browse their Knowledge Center for tons of in-depth resources on the home buying process.
Read our full review of Guaranteed Rate
First Internet Bank
Solely based online, First Internet Bank is an online mortgage lender that allows you to complete the entire mortgage application from your own home.
However, you can still call to talk to them on the phone whenever you’d like. First Internet Bank also offers a wide range of loans, including conventional, jumbo, FHA, VA, USDA, and home equity loans.
You can get a personalized mortgage rate in less than a minute. You can even sign up for email alerts to track mortgage rates as you shop for houses.
Getting prequalified takes just moments, and you can then submit the appropriate loan documents to get pre-approved. This extra step gives you a leg up on the competition once you’re ready to make an offer on a home.
Read our full review of First Internet Bank
Carrington Mortgage Services
If you have a question about a loan, you can chat with a Carrington representative from 7 a.m. until 6 p.m. PST. They’ve even been featured on Lifetime’s Designing Spaces.
So, it should go without saying that Carrington is available, and they want your business. Peruse their website, and you’ll see how user-friendly it is within moments.
They have a list of mortgage tools that will help you understand what you can afford. They also have a step-by-step guide outlining the loan application process.
Additionally, you’ll find a list of common mortgage terms that banks use, an explanation of loan types, and a mortgage application checklist.
Carrington is a top-notch mortgage company with an intuitive, user-friendly interface and great rates to boot.
Read our full review of Carrington Mortgage Services
Truist
Truist has a significant online presence for mortgages in addition to its physical branches throughout the country.
You can create an online account to apply for a mortgage loan or enter your zip code to find a location near you. Truist offers a suite of mortgages on top of the typical government-backed loans, including high-cost home financing.
Alternatively, if you meet certain income eligibility requirements, you may qualify for a HomeReady/Home Possible loan, which can help make homeownership more affordable.
Truist also offers a unique program for doctors to help licensed medical interns, residents, and fellows qualify for a mortgage.
Read our full review of Truist
U.S. Bank
Prequalify online within minutes, and from there, you can start making intelligent decisions about your future home. U.S. Bank offers conventional, fixed-rate loans, VA loans, ARMs, and FHA loans.
Want to design and build your dream home? They even have new construction loans and investment property loans.
They also have a “loan officer near you” app that lets you speak with someone who’s knowledgeable about your area and what it is specifically you’re looking to purchase.
You can also call their national number directly and someone will speak to you right then and there. U.S. Bank even has a FAQ section that answers questions you didn’t even know you had.
Read our full review of U.S. Bank
Other Top Mortgage Lenders to Consider
Didn’t find one on the list that you liked? Read our reviews of some other good lenders:
How to Find the Best Mortgage Lender
To find the best mortgage lender, it’s wise to compare mortgage rates and terms from multiple lenders. This will help you find a lender that offers the best deal. The lending standards may be similar across lenders, but the way they implement them may vary.
You might be surprised at how much variation you see in your different offers. Plus, mortgage loans can be structured in various ways to accommodate your financial situation or personal preferences.
If you don’t have a lot of spare cash on hand, you may be able to pay a higher interest rate to avoid higher closing costs. If you want to lower your monthly payments, your lender may let you pay for points to qualify for a lower rate.
It’s also helpful to understand where mortgage rates are right now and where they’re headed. A good real estate agent may be able to help you with this as they usually know the market quite well.
Know your credit score and the type of rate you should qualify for so you can negotiate the best deal possible. Some credit card issuers give you your FICO score for free.
How to Compare Mortgage Lenders
Here are some questions you may want to ask when searching for the best mortgage lenders:
How is their customer service?
What can they tell you about their closing costs and other associated lender fees?
How much do you need for a down payment?
How quickly can you close once you find a home?
These are all questions you should pose to at least two or three separate mortgage lenders.
Compare answers and determine which lender can offer you the best financial deal and meet any other expectations you have surrounding the loan process.
What should you look for in a mortgage lender?
Finding the best mortgage lender for your needs can take a while, so give yourself time. If you’re interested in a particular type of loan, such as a VA loan or an FHA loan, make sure the lender actually offers it.
Mortgage Interest Rates
Pick at least two or three mortgage lenders with good customer satisfaction ratings to compare pre-qualification offers. Then, take a look at the interest rates they offer you, whether the rate is fixed or adjustable, and what your monthly mortgage payments will be.
Taxes and Mortgage Insurance
Make sure they include an estimate for taxes and mortgage insurance, not just your principal and interest because that can make your payment increase by at least a couple hundred dollars.
Property Taxes
If you live in a more expensive area like a major city, expect to pay even more for property taxes. Of course, you can always refinance to get a lower rate down the road, but it’s expensive because of closing costs.
Fees and Closing Costs
Next, compare the closing fees of each mortgage lender. Some of the expenses won’t change from lender to lender. A title search, for example, will cost about the same amount regardless of what lender you go through. Origination fees, on the other hand, can vary greatly.
Expect to pay 3% to 5% of the loan amount for total closing expenses. Which end of the spectrum you end up on can make a huge difference in how much cash you’ll need.
A good lender will help you explore your options based on how much cash you have and how long you plan to be in the home.
Mortgage Points
If you have extra money and intend to make your new place your “forever home,” it may be worth paying extra points at closing in exchange for a lower mortgage rate. Ask each lender for different scenarios to see which best fits your individual needs.
How can you get pre-qualified for a mortgage?
There are two ways to start the mortgage process: a pre-qualification and a pre-approval.
Getting prequalified is an informational step to get an idea of what rates to expect and how much you can borrow based on your income and debt levels. You don’t have to supply any documentation at this time.
The quotes you receive are not set in stone and are subject to change with your official application. But it’s good to find out what types of loans you should consider, how much cash you’ll likely need, and what price range of home you should look at.
You’ll need more to actually make an offer on a home because most sellers don’t view a pre-qualification as official enough to indicate likely financing.
What is a pre-approval letter?
A pre-approval letter takes the pre-qualification process one step further. You essentially submit your entire application and all the accompanying documentation.
This includes things like your tax returns from the last two years, bank statements, explanations of any negative remarks on your credit history, and employment verification.
The mortgage lender also performs a hard credit pull to determine your mortgage interest rate. It takes a bit of time, but once you’ve been pre-approved, the lender provides a letter stating how much of a loan you qualify for and how much down payment you can provide.
When you submit an offer on a house, this addition makes it much stronger because the seller knows that you’re likely to get approved for the mortgage. Once your offer is accepted, you can lock in an interest rate with your mortgage lender for a certain number of days.
What type of mortgage should I get?
Some quick introspection is necessary to answer this question. Start by examining your financial position, household needs, and long-term goals. How secure is your income? Where do you want to live in the next few years? How much money can you raise for the down payment?
Answering these questions helps you pick the most appropriate mortgage type for you. Typically, the choice boils down to a conventional or government-backed mortgage. Conventional home loans have stricter requirements, such as a high credit score and sizable down payments. Government-backed loans allow lower credit scores and little to no down payment to qualify.
There are eight different types of mortgages spread across the two categories. Dig in as we explore each of them below.
8 Types of Mortgage Loans
Conventional Mortgage Loans
Conventional mortgages are home loans that the government doesn’t insure and fall into two categories: conforming and non-conforming.
A conforming loan means the loan falls within limits set by the Federal Housing Finance Agency. Non-conforming loans, such as jumbo loans, exceed the FHFA limit, which varies between counties.
Conventional Loan Requirements
Conventional loans have stringent credit score and debt-to-income ratio requirements. Mortgage lenders approve borrowers with a credit score of at least 620 and a 20% down payment. Buyers who can put at least 3% down may also be eligible but must pay primary mortgage insurance.
Pros
Cheaper than unconventional loans
Can qualify by putting 3% down
Cons
PMI on deposits less than 20%
Strict credit score and DTI ratio requirements
Best for: Buyers with large down payments, high income, stellar credit scores, and excellent credit history.
Fixed-Rate Mortgage
A fixed-rate mortgage is a home loan that carries a fixed interest rate over its lifespan. Once the interest rate is locked in, it’s not affected by changes in market rates.
Fixed-rate mortgages are the most popular home loans, thanks to their predictability. Knowing your mortgage payment every month helps borrowers more easily plan their finances. As a result, you can be sure that there are no surprises month-to-month.
Fixed-Rate Mortgage Loan Requirements
Lenders use your credit score, debt-to-income ratio, credit history, income, and down payment to determine eligibility and set mortgage rates. Credit scores are a primary determinant, and most mortgage lenders approve borrowers with scores above 620.
Credit scores above 740, low DTI ratio, stellar credit history, and a significant down payment command the most competitive mortgage rates. Conversely, low credit scores lead to higher interest rates, and a down payment of less than 20% triggers the need to pay private mortgage insurance (PMI).
Fixed-rate mortgage terms range from 10 to 30 years, but 30 and 15-years loans are most popular. The length of your mortgage also determines the interest rates and monthly payments.
Pros
Predictable monthly payments
Nonfluctuating interest rates
Easy qualifications
Large tax deductions
Cons
Higher mortgage rates
High-interest amount
Slow equity growth
Adjustable-Rate Mortgage
As the name suggests, adjustable-rate mortgages carry an adjustable interest rate set by the prevailing market rate. An ARM starts with a fixed interest rate for a few years then changes to a variable rate for the remaining loan term.
An ARM can be locked for one, three, five, seven, or ten years, but 5/1 ARM loans are most common. With a 5/1 ARM, the interest rate is locked for the first five years and then adjusted annually for the remainder of the term.
Typically, the interest rate on an ARM adjusts upwards because the initial interest rate is often lower than the prevailing market rate.
Pros
Predictable and low initial monthly payments
You can save a considerable amount of money at first
Cons
Increased mortgage rates
Monthly payments can be expensive
Best for: Borrowers who are likely to secure a pay hike in the future but want to lock in lower rates when their income is lower.
FHA Mortgage
An FHA loan is a mortgage guaranteed by the federal government and insured by the Federal Housing Administration (FHA). You can only secure an FHA loan from an FHA-approved lender. The agency insures home loans are issued by accredited lenders such as credit unions, banks, and mortgage companies, protecting mortgage lenders if a borrower defaults on payment.
FHA Loan Requirements
These loans help modest-income households buy a home. You need a 3.5% down payment, a credit score of 580 or higher, and a DTI less than 50 to qualify for an FHA loan. You can be eligible with a 500 credit score if you raise a 10% down payment.
Since the government insures FHA loans, FHA lenders can extend favorable terms to people who wouldn’t otherwise qualify for a mortgage. FHA loans carry a mortgage insurance premium (MIP) for at least 11 years, and FHA mortgages with less than 10% down must carry FHA insurance over the life of the loan.
You can use an FHA to buy or refinance a condo, single-family home, 2 to 4-unit multi-family home, and select manufactured homes. In addition, some FHA loans can finance new construction and home renovation.
The limits on FHA loans vary by county, and as of 2021, you can borrow between $420,860 and $970,800. Your county’s living costs determine the limit on FHA loans.
Pros
Requires a 3.5% deposit
High loan limits
Accommodates low credit scores
Cons
Mandatory mortgage insurance
Only finances primary residence
Best for: Low and moderate-income households and borrowers without a large down payment.
VA Mortgage
VA loans are guaranteed by the U.S. Department of Veteran Affairs but issued by private lenders such as mortgage companies, banks, and credit unions. VA loans help veterans, current service members, and eligible spouses buy a home without a down payment.
The government guarantee allows VA accredited lenders to extend favorable terms to borrowers without a deposit. Although VA loans carry attractive terms, they have stringent qualification requirements. Only qualified active-duty service members, veterans, and surviving spouses can apply for VA loans.
VA Loan Requirements
While a VA loan offers 100% financing when buying a home, VA lenders will consider credit score, DTI, and income level when issuing a loan. There are no minimum credit score requirements, but you typically need a credit score of at least 620 to qualify.
In addition, veteran and surviving spouses can only use a VA loan to finance their primary residence. But active-duty service members can use the loan to buy a second home if they plan to move into it within 60 days of closing.
Your county of residence determines the VA loan limit. As of 2021, the county limit on VA loans ranges from $548,250 to $822,375, depending on the cost of living. However, you can get a VA loan that exceeds the county limit if you make a down payment.
Pros
No down payment
Competitive mortgage rates
Lower closing costs
No private mortgage insurance
Cons
Can’t finance an investment property or vacation home
Carries a VA loan funding fee
Strict property requirement
Best for: Eligible veterans, active-duty service members, and surviving spouses.
USDA Mortgage
USDA loans are zero-down payment government-backed mortgages guaranteed by the U.S. Department to help rural homebuyers. The loans help people with modest incomes who can’t buy homes using traditional mortgages.
USDA home loans are offered under the USDA loan program or USDA Rural Development Guaranteed Housing Loan Program. The program aims to bolster the economy and improve the quality of life for people in rural America. It waives the down payment, offers competitive mortgage interest rates, and is highly accessible.
You can apply to any of the three USDA loan programs, including:
Loan guarantees: The USDA guarantees a mortgage issued by a local lender. That allows you to access a loan with attractive terms without a deposit.
Direct loans: These are subsidized home loans for low and very low-income borrowers with interest rates as low as 1%.
Home improvement loans and grants: These are loans or outright grants to help homeowners upgrade or repair their homes. Some loan packages pair the loan with grants of up to $27,000.
USDA Loan Requirements
Qualifying for a USDA-backed home loan depends on the income and size of your household. The income limits vary by location and depend on your county of residence. Only U.S. citizens or permanent residents can use these loans to finance an owner-occupied primary residence.
You can qualify for a USDA mortgage with a credit score of 640 or higher, a DTI of less than 41%, and if the monthly repayment won’t exceed 29% of your monthly income. The USDA may consider a higher DTI for applicants with credit scores above 680. Applicants with scores lower than 640 may still qualify but are subject to more stringent borrowing conditions.
You also need to demonstrate a dependable income over two years, have a good credit history, and have no account in collection within the last year.
The USDA loan limit is a moving target that varies between counties, based on the cost of living. The loan can be as high as $500,000 in high-cost counties like Hawaii and California and $100,000 in rural America.
You can only access a direct loan from the USDA if your home is less than 2,000 square feet and has a market value below your county loan limit. The USDA program excludes metropolitans but covers some suburbs.
Pros
100% financing
Ultra low fixed interest rates
Includes financial grants
No private mortgage insurance
Cons
Geographical restrictions
Finances single owner-occupied residences
Best for: Borrowers with limited financial resources or those wishing to live in rural areas.
Jumbo Mortgage
Jumbo loans finance homes that exceed the FHFA limits of a conventional mortgage. Jumbo loans are considered non-conforming mortgages and are considered high-risk loans.
Since they exceed the FHFA limits, Freddie Mac and Fannie Mae do not guarantee jumbo loans. That means the mortgage lender may incur losses if the borrower defaults. Jumbo loans can carry an adjustable or fixed interest rate and have strict requirements.
Jumbo Loan Requirements
You need a credit score of 700 to 720, a DTI of less than 45%, and plentiful cash reserves in the bank to qualify for a jumbo loan. Lenders require extensive documentation to show excellent financial standing. You’ll need W-2s, complete tax returns, and 1099s as well as your investment accounts and bank statements.
The minimum down payment on jumbo loans is often higher than traditional loans because they lack a government guarantee. Most mortgage lenders require a 10% to 30% deposit. Jumbo mortgage rates depend on your finances and your lender.
Some lenders charge higher rates on jumbo loans than conforming ones, while others offer lower rates. The closing costs and lender fees on a jumbo loan are often higher because of extra qualifying steps and the high loan amount.
You can use a jumbo loan to buy a home, refinance an existing mortgage for cash-out purposes, or purchase an investment property and land. However, since FHFA doesn’t govern jumbo loans, the loan limit could run into the millions.
Pros
Higher loan limits
Can finance investment property
Competitive interest rates
Flexible uses
High loan amounts
Cons
Requires high credit scores
You need high income
Requires plenty of cash reserves
Best for: People buying expensive property and homeowners looking to refinance a large loan.
Interest-Only Mortgages
Interest-only mortgages are relatively short-term loans, usually structured as ARMs for 5 to 10 years. During the loan, borrowers pay interest on the loan without repaying the principal. Since you’re not paying back any borrowed money, you’re not building equity in the home. Your equity in the house remains the value of the down payment and any appreciation in the home’s market value.
At the end of the loan term, your loan amount remains the same unless you’ve made separate payments to offset the principal. Once the initial term lapses, you can pay off the loan, switch to making amortized payments, refinance, or sign up for another interest-only term.
Interest-Only Mortgage Loan Requirements
An interest-only loan requires a good credit score, 700 or higher, a large deposit, and a low debt ratio. There are no standard requirements, so they vary widely between mortgage lenders. But you’ll need to demonstrate an ability to pay and own ample assets to qualify.
Pros
Low initial monthly payment
Low initial mortgage rates
Variable loan terms
Cons
You don’t build equity
Your equity declines if property value drops
Best for: People with high disposable income, large cash reserves, rising incomes, or borrowers who receive large annual bonuses.
Best Mortgage Lenders FAQs
Which lenders have the best mortgage rates?
Mortgage rates can vary significantly from lender to lender, and can also fluctuate over time. It’s difficult to say which lender has the “best” mortgage rates at any given time. It can depend on a variety of factors, such as your credit score, the type of loan you’re looking for, and the location of the property you’re buying.
That being said, some lenders may offer more competitive rates than others. One way to find the best mortgage rates is to shop around and compare offers from different lenders. You can do this by visiting the websites of different banks and mortgage companies, or by working with a mortgage broker.
Another important factor to consider when shopping for a mortgage is the fees associated with the loan. Some lenders may have lower rates but charge higher fees, while others may have higher rates but charge lower fees. Make sure to compare the total cost of the loan, including the mortgage rate and fees, when shopping for a mortgage.
How do I get the best mortgage rate?
To get the best mortgage rate, you should:
Have a good credit score. The higher your credit score, the more likely you are to qualify for a low mortgage rate.
Shop around for rates from multiple lenders. Compare rates from banks, credit unions, and online lenders to find the best rate.
Make a large down payment. Putting more money down on the home can lower your mortgage rate.
Consider different loan types. Adjustable-rate mortgages and shorter-term mortgages typically have lower rates than fixed-rate mortgages.
Consider paying “points” or additional fees to lower your rate.
Get Pre-approved for a mortgage before you shop for a house.
Be prepared to provide extensive documentation to the lender to show you can afford the loan and can make the payments.
It’s worth noting that interest rates are not the only thing to consider when shopping around for a mortgage. You should also compare other terms, fees, and loan programs that lenders offers. It’s always a good idea to consult a mortgage expert or a financial advisor for guidance on this matter.
How much house can I afford?
A widely accepted method for determining how much you can afford to spend on a home is the 28/36 rule. This rule states that you should not spend more than 28% of your gross, or pre-tax, monthly income on housing expenses.
Additionally, the rule states that you should not spend more than 36% of your income on all debt payments, including your mortgage, credit cards, and other loans, such as auto and student loans.
For example, if your gross monthly income is $5,000, you should not spend more than $1,400 (28% of $5,000) on housing expenses, including your mortgage payment, property taxes, and insurance. And you should not spend more than $1,800 (36% of $5,000) on all debt payments, including your mortgage, credit cards, and other loans, such as auto and student loans.
So, if you have $500 in existing debt payments, your monthly mortgage payment should not exceed $900.
If you’re thinking about purchasing a home but you’re not really happy about the current mortgage rates, you’re not alone. According to Freddie Mac, home sales have slowed due to the 30-year fixed mortgage rate staying above 6.5% since May.
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Since the end of 2021, mortgage rates have made quite a leap. For example 30-year fixed-rate mortgages have increased from 3% to over 7.5% and 15-year fixed-rate mortgages have jumped from 2.3% to more than 6.7%. Even so, Dave Ramsey says the increase in mortgage rates shouldn’t deter you from shopping from a home.
Here’s why you shouldn’t wait for mortgage rates to go down to buy a house.
Why You Shouldn’t Wait for Mortgage Rates To Go Down
According to Ramsey’s blog, even though mortgage interest rates are high right now, if you’re financially ready to do so, you should go ahead and buy a house.
“Mortgage interest rates are high right now,” Ramsey said, “but we don’t know for sure whether they’ll go back down anytime soon — they may even keep going up if the Federal Reserve decides to raise the federal funds rate again.”
Ramsey also wrote that, no matter what, housing prices will keep increasing, as is normal, and the best course of action is to buy now and lock in your home’s price. Once interest rates decrease in a year or two, he wrote, you can refinance to a lower rate.
Additionally, Ramsey pointed out that because interest rates are high right now, fewer people are buying homes, which means you won’t have as much competition when you make offers.
Also: Grant Cardone Reveals 6 Cities He Would Buy Investment Property in Right Now (and Where He Would Avoid)
What If You Wait Until Mortgage Rates Go Down?
Matt Ricci, a home loan specialist with national lender Churchill Mortgage, said it’s reasonable to expect lower interest rates in the next 18-24 months.
“The United States will be in an election cycle,” he said, “so the economic climate will most likely favor lower interest rates.”
However, don’t get too excited. According to Ramsey, the drop in interest rates likely won’t be enough to make a significant difference.
“But even if mortgage rates do go down in 2024, odds are the drop won’t be drastic — it’s not like rates are going to quickly return to the 2% to 3% range we saw at the end of 2021,” Ramsey wrote. “The bottom’s not about to fall out here.
“For example, even though the National Association of Realtors believes rates will go down in 2024, they’re only predicting a half-percent drop — from 6.5% to 6% — by the end of the year. A lower rate is definitely nice, but that small of a drop isn’t worth waiting around for.”
Besides that, there are other issues to consider if you wait until mortgage rates decrease.
“While lower interest rates would certainly favor additional inventory,” Ricci said, “the ratio of renters in the market compared to homeowners — in combination with a major gap in new construction — will still favor a larger demand for housing than supply of housing for sale.”
Ricci also said that when rates come down, home prices could increase. “So, while you certainly would have a lower rate on a mortgage, you would also be spending and borrowing more.”
Are You Financially Ready To Buy a House?
Before you start the homebuying process, Ramsey recommends you check the following four boxes. If you can’t check all four, he recommends waiting until you can.
You don’t have any consumer debt. This includes student loans, credit card payments or car notes. This will ensure that you have more room in your budget.
You have at 3-6 months’ worth of typical expenses saved. Unexpected expenses happen and having a solid emergency fund will allow you to pay for them without using your credit cards or dipping into your retirement accounts.
You’ve saved a substantial down payment. If you’re a first-time homebuyer, you’ll need at least 5% to 10%, Ramsey wrote. Additionally, putting 20% down can allow you to forgo mandatory private mortgage insurance, which could save you hundreds of dollars per month.
You can afford the house payment. Your house payment, including principal, interest, homeowners insurance and HOA fees should not equal more than 25% of your take-home pay, according to Ramsey. If it is, you risk not being able to meet your other financial goals.
Ensuring you are financially ready to buy a house will help you avoid your home being a financial burden that you might regret.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Dave Ramsey: Why You Shouldn’t Wait for Mortgage Rates To Go Down To Buy a House
Shares of Countrywide gained about a buck in the last two trading sessions as the proposed merger with Bank of America showed signs it was pushing forward.
According to a press release dated May 28, Countrywide plans to hold a meeting with its shareholders at its Calabasas, CA headquarters on June 25 to vote on the deal.
Countrywide shareholders who held stock as of April 28 will be permitted to vote on the proposed takeover bid, which has been unanimously recommended by the Countrywide board.
If the deal goes through as planned, Countrywide shareholders will receive 0.1822 of a share of Bank of America common stock for each share of Countrywide common stock, which as of Tuesday valued Countrywide shares at $6.23.
Bank of America expects to complete the $4 billion merger in the third quarter of 2008, although a failed deal could be subject to a $160 million termination fee under certain circumstances.
Yesterday, Countrywide shares got a boost after Bank of America announced that current Countrywide president David Sambol would retire shortly after the merger is completed.
But despite all the forward-looking news, the deal still has a lot of question marks as evidenced by a slew of negative senitment from analysts regarding the merger.
Recently, three analysts recommended that Bank of America lower their bid for the mortgage lender to anywhere between $0-$2, or scrap the deal entirely.
Conversely, minority holders like SRM Global have argued that Bank of America should raise its bid for Countrywide.
Regardless of the outcome, expect it to be a bumpy ride…
Shares of Countrywide were up 49 cents, or 9.84%, to $5.47, still trading at a discount to their expected acquisition price.
Federal student loan interest rates are set by Congress. Each spring, they determine the next school year’s interest rates based on the high yield of the last 10-year Treasury note auction in May. The new rates apply to loans disbursed between July 1 and June 30 of the next year.
For private student loans, the lender determines the interest rate, and it may vary depending on which financial institution you’re working with as well as your own financial profile. Unlike federal loans, the decision to change rates on a private student loan rate can happen more than once a year. A private lender might change rates monthly, quarterly, or annually — it’s up to them to decide.
If you already hold student loans, then the rates of those loans may or may not change. It depends on whether you have a federal or private loan, and if that loan has a variable or fixed interest rate.
Learn more here about the federal student loan interest rate in 2023-24, what’s being proposed for the future, and options you have if your loan has a variable interest rate.
Federal Student Loan Interest Rates Change Annually
Under a law adopted by Congress in 1993, the federal government pegged federal student loan interest rates to the longer-term US Treasury rates, and those interest rates are adjusted annually for new federal student loans.
Your interest rate will also depend on the type of loan you take out. Direct Subsidized Loans and Direct Unsubsidized Loans tend to have the lowest rates, while Direct PLUS loans have the highest. Sometimes, Congress will lower interest rates, but they raised them in 2022 and 2023. We won’t know federal student loan interest rates for the 2024-25 school year until May 2024.
Each year, the new rates take effect on July 1 and apply to federal student loans taken out for the following academic year. The federal student loan interest rates rose from the 2017–2018 to the 2018–2019 school years, but decreased for the 2019–2020 and 2020-2021 school years. For the 2021-2022 and 2022-2023 school years, student loan interest rates increased again.
Note, though, that these changes only apply to new student loans. Once you’ve taken out a federal student loan, the rate of that loan will stay the same unless you pursue consolidation or refinancing. 💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
Student Loan Rates for the 2023–2024 School Year
So what will student loan interest rates be in 2023?
For the 2023-2024 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 5.50%, the rate on Direct Unsubsidized loans for graduate and professional students is 7.05%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 8.05%. The interest rates on federal student loans are fixed and are set annually by Congress.
In an effort to keep the interest rates on federal student loans from skyrocketing, Congress has set limits on how high-interest rates can go. Undergraduate loans are capped at 8.25%, graduate loans can’t go higher than 9.5%, and the limit on parental loans is capped at 10.5%. Since 2006, the highest interest rates reached for Direct Subsidized Loans and Subsidized Federal Stafford Loans was 6.8%. 💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
Private Student Loan Rates Can Change at Any Time
Private student loans are from banks, credit unions, and other financial institutions, and they get to set the interest rates on the loans they disburse. Some private loans have fixed rates, which means you lock in an interest rate and it doesn’t change for the life of the loan. Other private loans have variable rates, which means the interest rate might go up and down over the course of the loan.
As of July 2023, financial institutions use Secured Overnight Financing Rate (SOFR) to help with pricing corporate and consumer loans, including business loans, student loans, mortgages, and credit cards.
Private lenders can raise or lower interest rates at any time, but any changes usually have to do with changes in the economy, such as the Federal Reserve deciding to raise or cut interest rates.
If Your Loan Has a Variable Interest Rate, a Hike Could Be in the Cards
If you take out a federal student loan, the loan’s interest rate is fixed. This means the interest rate stays the same over the life of the loan. But since you need to re-apply for federal aid every year you attend college, you may end up with four loans with four different interest rates.
When you apply for a private student loan or refinance an existing loan, borrowers can typically choose between a fixed and variable interest rate.
When you take out a private student loan, the original rate depends on your credit score, employment history, and current income level — among other factors, which vary by lender.
If your private loan has a variable rate, the rate may fluctuate as the economy changes. In the past year, the Federal Reserve has increased benchmark interest rates numerous times to try to help control inflation. Rates may rise again, but it’s impossible to say for certain.
Recommended: Student Loan Refinancing Guide
What to Do if You Have a Variable-Rate Loan
If your private student loan has a variable interest rate and you’re worried that interest rates might increase, you may have some options. Student loan refinancing involves taking out a new loan with a new interest rate. By refinancing, borrowers have the opportunity to make only one monthly payment instead of balancing multiple payments, and they may be able to lock in a fixed rate so they no longer have to be concerned with rate hikes.
Individuals whose financial situation has improved since originally borrowing their loan(s) may qualify for a lower interest rate.
The Takeaway
Should you refinance your student loans if you’re worried interest rates will change? If you have federal loans, you’ve already locked in a fixed interest rate so you don’t need to worry about interest rate changes. Plus, it’s important to remember that when federal student loans are refinanced, they are no longer eligible for federal borrower protections. But if you have a private loan with a variable interest rate, it may be worth exploring loan refinancing.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
Student Loan Refinancing If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) 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, such as the SAVE Plan, or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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.
Inside: Looking for a job that pays at least $25 per hour? This list has the best jobs that fit that description. Each job offers unique benefits and opportunities, so take a look and see if any of them match your interests and skills.
Making $25 an hour is not a pipe dream; it’s a viable reality for thousands of people worldwide.
Earning such an income not only instills a sense of financial well-being but also provides a robust platform to plan for the future.
Today, we dive into elucidating the different opportunities potential jobs offer, aligning your skills and experience with an hourly rate that feels just right for your wallet.
Hence, securing such a job is not a function of luck but more a strategic alignment of skills, passion, and industry demands. But if you’re not entirely sure about where to begin or how to hone your skills for these high-paying jobs, don’t worry.
Imagine earning smooth entry-level jobs 25 an hour, all from the comfort of your workspace. Sounds enticing, right?
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Best Jobs That Pay $25 an Hour
This section will highlight various professions across distinct fields that provide such a desirable pay rate.
Looking for jobs that pay $25 per hour? We’ve got you covered.
Whether you’re transitioning careers or just starting, this list could help you discover a role that fits your skills and experience.
1. Paralegal
A paralegal role is an excellent job choice due to the vast knowledge gained in the field of law and legal procedures.
Being a paralegal involves a variety of interesting tasks, such as helping lawyers prepare for hearings, trials, and corporate meetings.
This position is not solely monetarily advantageous, it also presents opportunities for growth and professional development in the legal sector.
Earning Potential: It offers rewarding prospects with an average pay of $25 per hour, with the potential to earn up to $40 an hour depending on experience and expertise.
2. Landscaper
Why toil in a stuffy office when the great outdoors can be your workspace? Relish the satisfaction of planting, pruning, and mowing yourself into a healthier, happier lifestyle.
Ideal for nature enthusiasts and people persons out there, landscaping combines green-thumbed work with personnel management. A knack for the outdoors and previous work experience will be your stepping stones, while a certificate in grounds maintenance can make your application stand out.
Start by volunteering in your local community gardens or offering your services to neighbors. Through this, not only will your skills blossom, but your resume will flourish, too.
Earning Potential: You can expand your lucrative landscaping journey by owning your own company and training others to be laborers.
3. Truck Driver
Why is it a top-tier job, you ask? Consider this: truck drivers are the beating heart of global commerce, pivotal figures in ensuring warehouses stay stocked and goods reach their desired destinations. Plus, you’re free of the traditional office environment.
This job is perfect for those who prefer to work alone as well as those who prefer delivery routes that often stretch into the night.
You must be over the age of 21 years old and able to pass a CDL exam. Many truck drivers to a training course to get a jumpstart in the industry.
Earning Potential: Many truck drivers start their own company and will employ a couple of rigs to make passive income.
4. Social Media Marketing
Do you have a knack for creating engaging captions or a Sherlockian eye for data? Then Social Media Marketing could be your calling.
This position, hot in demand and rewarding, calls for creativity and analytical prowess.
Why is it a top job? Well, it’s not for the adrenaline rush of its fast pace. It’s the fact that you get to put your tech-savviness to great use. Social media marketers nurture and grow brands through smart strategies and engaging content.
Earning Potential: Many people start working for someone else as a Social Media Coordinator and then go on to open up their own business.
5. Event Planners
As an event planner, you are the unseen forces behind flawless galas, memorable weddings, and standout corporate functions. If you thrive on creativity, organization, and people skills, you will ensure that each event is meticulously executed.
This role allows you to blend creativity with pragmatic decision-making: from the captivating process of selecting venues, and coordinating with caterers
It’s a dream job for you if you love putting smiles on people’s faces and making their day unforgettable.
Earning Potential: An enticing reason is its attractive pay rate: on average, $24-28 per hour, peaking up to $40, with the potential of a quick pay raise. Plus those lucrative tips!
6. Mechanical Technician
If you’re seeking a rewarding, high-paying role that gets you hands-on with varied machinery, then a Mechanical Technician career.
This role is particularly apt for those with a fascination for machinery and a problem-solving mindset. To climb the ladder to success, one needs to keenly understand how to operate and maintain industrial machines, prevent damage, and optimize performance.
So gear up to diagnose, adjust, repair, and don’t forget – your hands, mind, and machines are a team.
Earning Potential: With an average pay of $26 per hour, you can start repairing machines and set up your own company.
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7. Maintenance Technician
This job is best suited for those who enjoy diagnosing technical puzzles and are adept at hands-on solutions.
By developing a strong mechanical aptitude, attention to detail, and top-notch problem-solving skills. Remember, your primary duty is ensuring machinery and equipment operate smoothly – the backbone of any industry.
Start by checking out some free online webinars or training programs related to industrial maintenance.
This is a low-stress job that pays well without a degree.
Earning Potential: As an entry-level worker, you can start by having a vocational certification or general education diploma (GED).
8. HVAC Technician
This role is perfect for those who love hands-on work and can’t get enough of problem-solving – who wouldn’t enjoy the thrill of being an office’s last defense against an impending heatwave?
The key to thriving in this breezy career path is training – dive into an HVAC training program at a vocational school or consider an associate degree in RACH (refrigeration, air conditioning, and heating).
Earning Potential: Being an HVAC technician pays around $25.75 an hour, which will keep your bank balance healthily ‘ventilated’. By having experience, your hourly wage can increase more.
9. IT Support Specialist
If terms like configuring, maintaining, and troubleshooting tech equipment are your weekend chat topics, you’re the perfect match for this.
Thanks to Google’s free certification program, you can start this job by having online training in your spare time.
Start your journey by heading over to Google’s free IT certification program today. Master the IT realm, earn well, and enjoy your work- the trifecta is right there!
Earning Potential: An IT Support Specialist has an average above $25 an hour wage and could rise to $51 an hour for having experience.
10. Day Trader
By poised as a top job due to its flexibility and potential for high earnings, day trading allows you to take full control of your income by making well-informed decisions about the financial market.
It’s perfect for those with an acute mind for numbers, an unflappable nerve, and those who enjoy working from the comfort of their study.
All it takes to get started is some knowledge about the stock market – something you can easily acquire by attending a free webinar or training, which is accessible online!
Of course, remember the golden rule – never invest money you can’t bear to lose. Now, conquer the finance world, one trade at a time!
Earning Potential: By having the eagerness to be a learner and acquire more knowledge about this job, you can earn way higher than you thought. But, there will always be a risk when trading stocks.
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11. Bartender
This job is perfect for friendly individuals! As you’re the life of the party.
Your life will be as vibrant as a well-mixed cocktail—chock-full of lively conversations and new friendships.
Bartending has a steep learning curve, but the payoff is big as it is a job that pays weekly and even daily. Know your spirits, perfect your pour, and master the mix—each skill is a toast to your increasing bank balance.
So, roll up your sleeves, flash that charismatic smile, and prepare to shake things up in the bustling world of bartending.
Earning Potential: With an entry-level job—at a local pub or a fine dining restaurant, you’ll get paid handsomely, at least $25 an hour.
12. Mechanic
The job is a perfect blend for those with a knack for solving complex issues and have the stamina to be on their feet for prolonged periods.
If you’re not averse to the roar of engines and the smell of oil, you might be the grease monkey we’re looking for.
This job is perfect for dipping your toes in oily water. So, go ahead, rev up your career with a mechanic job!
Earning Potential: Personally, my independent auto mechanic makes way more than $25 an hour, but he has years of expertise and opened his own shop.
13. Transcription
Transcription suits anyone craving flexibility or looking to dip their toes into fields like legal, medical, and entertainment.
To shine, you’ll need to master speed, accuracy, and the art of capturing every ‘um’ and ‘ah.’ Noise-canceling headphones and a quiet workspace are your best friends.
Kickstart your move to transcription with free training like a mini-course to see if you like it. Gain insights into making money and build your portfolio.
This high-demand job needs skills you convert audio into text.
Earning Potential: By working remotely as a transcription, you can earn an impressive $25 an hour or more.
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14. Accountant
Start your second act as an accountant today. The balance sheets await your expertise.
By aiding your clients in reviewing their financial information, preparing tax and finance documents, and updating their changes in tax laws or governmental regulations. Certified Public Accountants (CPAs) can earn exceptionally well.
The longer you’re in the industry, the more you can be able to demand potential compensation for your service. Just by conducting audits, successful financial and bookkeeping strategies. CPAs perform a pivotal role that justifies their earnings.
Earning Potential: Right now, there is a severe shortage of accountants graduating from college. So, your earning potential will substantially increase with each year of experience, and possibly earn up to $50 an hour.
15. Proofreader
Proofreader is an ideal job for detail-oriented individuals with a passion for perfect punctuation, splendid spelling, and grandiose grammar.
Did you get a degree in English or similar? Perfect! But remember, while it helps, it isn’t a must-have.
It’s an excellent stepping stone for a stay-at-home parent or anyone seeking to make some extra cash it is one of the best jobs for moms. So hop on the proofreading wagon and ride your way to a more profitable future!
Earning Potential: Just by sitting and reading on your couch, you can now hop on and start earning $25 an hour depending on experience.
16. Recreational Therapist
Bring great immense job satisfaction by improving the lives of those grappling with illness and disability.
To get started, all you need is a bachelor’s degree in recreational therapy and then obtain a Certified Therapeutic Recreation Specialist credential.
So, why wait to become an everyday hero with a salary that smiles back at your bank account?
Earning Potential: You can earn more than $25 an hour by being a Certified Therapeutic Recreational Therapist.
17. Dental Assistant
Do you have strong communication skills, and the ability to partake in a hands-on career?
Just sterilizing equipment or lending a diligent hand during treatments will be part of your daily grind. Ensure every instrument screams ‘clean’ before the dentist reaches for it.
To become a dental assistant, you typically need to earn a certification or diploma through a dental assisting program, which often takes about a year to complete.
On-the-job training may also be required, during which you’d learn about dental procedures, patient care, and office duties under the supervision of a dentist.
You may have found the tooth fairy’s best job yet! Dive in!
Earning Potential: With a wage average of $19 an hour and earning up to $25 just being a Dentist Assistant.
18. Certified Nursing Assistant
Have a career dream to dive into the healthcare industry? Familiarize yourself with basic health practices, hygiene, and safety procedures.
Start your journey as a Certified Nursing Assistant by attending to patients, assisting nurses, and providing emotional support to everyone. You will have to start a training program, but thankfully there are many to choose from.
Earning Potential: This career pays more than $25 an hour and might increase through experience and skills.
19. Housecleaners
According to Zippia, 48.9% of the housecleaner’s qualification is to have a high school diploma, but experience could help. You must have a strong understanding of cleaning procedures and practices.
Also, you can consider taking a course to learn about safety guidelines and recommendations.
Other important attributes include attention to detail, physical stamina, and excellent time management skills.
Earning Potential: Whether you’re a single mom or a high school graduate, you can potentially earn up to $25 an hour.
20. Nanny
Fascinated by child psychology or studying pedagogy? Or just love kids? Then, this job is tailored for you; it offers both consistent income and practical field experience.
Getting started can seem daunting, but it doesn’t have to be. Step into the kiddie world, it might just be the best move you make. Where you are not required to pass any school diploma.
You can find plenty of nanny gigs on Sittercity.
Earning Potential: If being a nanny is just a child game then I want in and earn up to an incredible $1000 to $1100 a week.
21. Delivery Drivers
Welcome to the job of a delivery driver, a blend of independence and earning potential on wheels. When you are good at your job, you don’t have customers wondering how late does Amazon deliver.
This career is a perfect fit for introverts who prefer their own company, the job offers flexibility with the ability to set your hours.
But, keep in mind that larger roles, such as FedEx, may require truck driving experience, the ability to lift heavy boxes, and the completion of a few additional checks.
Earning Potential: Most delivery drivers for FedEx and UPS are union workers. Thus, they have the union to fight for pay increases. Plus you can increase your salary by moving up in the ranks.
22. Licensed Plumbers
Get ready to hop into commercial, residential, and industrial projects, working flexibly based on your schedule.
If you love problem-solving and can handle the occasional wade through the muck, then this amazing career is for you! Don’t worry about your expertise level; It’s the perfect time for you to dip your toes into the world of plumbing.
Earning Potential: Don your gloves, grab your tool kit, and join the ranks of expert plumbers making upwards of $25 an hour.
23. Athletic Trainers
Are you into sports and fancy being in the thick of the action?
You are considering becoming an Athletic Trainer – a well-paid role that combines both your passions brilliantly. Then, get to work closely with athletes, which means you’re right at the heart of the sports action.
You’ll need to be certified and licensed in healthcare to offer your professional services. The ball’s in your court!
Earning Potential: Earning about $25 per hour, it’s among the few amazing careers that can up your game financially and health-wise. Also, it may take you to the Super Bowl as the team’s athletic trainer!
24. Customer Service Managers
So, you’re a people person with a knack for solving problems? Consider a job as a Customer Service Manager.
This job is best for ambitious, empathetic individuals who love making a difference in customer experience, enhancing team performance, and ensuring business profitability.
Want to up your game? Brush up on customer relationship tools like Hubspot or project management tools like Asana. Then, prepare to rule the customer service realm as an expert Customer Service Manager.
This can be a great non-phone work-from-home job as many customer service requests are handled through chat and email.
Earning Potential: One of the amazing careers that pay a satisfying $25 per hour, it’s a chance to flex those crucial customer service muscles while managing a team.
25. Freight Broker
With an average pay topping most traditional roles, this often-overlooked profession is a gem amidst the rubble.
Here’s why: Despite its lucrative nature, competition in freight brokerage is surprisingly low.
Jumpstart your journey with a free webinar or training – there are many available online. This will equip you with vital information about the ins and outs of the role and the industry.
Earning Potential: You will be surprised to learn what a freight broker’s salary can be.
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FAQs
Have you ever dreamt of earning $25 an hour with flexible hours at your convenience?
The list above are some of the jobs that can earn $25 an hour. However, try to evaluate yourself if the requirements perfectly suit you. By having skills and experience on the said job you can ace up and boost your chances of getting one of the high-paying jobs above.
Unlock and upgrade your skills now by attending any training that aligns with your dream job. Be able to receive a rewarding amount of earnings in your pocket!
These amazing careers above can fetch you at least $25 per hour. Start earning big and turn your dream into your paycheck.
Improving your skills through attending training, updating certificates, and seeking additional knowledge in your field. Plus, It increases your chances of landing a job that pays $30 an hour.
Actively applying for new jobs, particularly those that value your enhanced skills, can open the door to higher-paying opportunities potentially enabling you to reach that $30 an hour wage.
So master the craft, build your credibility, and let your work do the talking.
The ball is in your court now. Step up and start crafting your destiny, one skill (and dollar) at a time. So, start attending any training that is aligned with the career you’re looking for.
Find out what should I do for a living. Sign up for a free webinar or training. Sites like Udemy and Coursera offer a plethora of free courses to help you fine-tune your skills or discover new ones.
Which Applications will you Submit for jobs paying 25 an hour?
The possibilities in today’s remote job market are exhilarating. Amid the myriad of options, some rake in at least a solid 25-dollar-an-hour job.
Begin by brushing up on your skills or discovering new ones through free webinars or training sessions that align with your chosen profession to increase your qualifications. Make sure your resume is polished and start applying to suitable jobs in your field. The next step is nailing that job interview.
Thus, finding and applying for such lucrative positions is not just an aspiration for a better standard of living, but a practical step towards improved financial stability.
Remember to job-seek smartly and relentlessly. The end game is finding that perfect remote job – working on your terms, from your comfy corner of the world, and padding your bank account one $25 hour at a time. It’s time to get cracking!
Know someone else that needs this, too? Then, please share!!
Home equity is one of the main benefits of owning a home. Renting puts money into a landlord’s pocket, but owning a home helps you increase the value of your investment over time. When you do build home equity, it opens up cash-out options that can be used for home improvements, education expenses, paying off debt or other projects.
How can you tap into this valuable equity and turn it into cash? Typically you can access equity through a second mortgage, such as a home equity line of credit (HELOC) or a one-time home equity loan, or by using an alternative option like a cash-out refinance.
Let’s take a look at what a HELOC is, how it works and how it differs from other products that allow you to take advantage of the equity you’ve built in your home, like a home equity loan or cash-out refinancing.
What Is a Home Equity Line of Credit (HELOC)?
A home equity line of credit allows you to take out funds based on your home equity and pay it back with a variable interest rate. You can think about it as a credit card: Homeowners have access to a credit line that they can take from and pay back while using their home equity as collateral if they’re unable to make payments. Essentially, HELOCs enable homeowners to borrow against their own home equity.
Generally speaking, HELOCs have lower interest rates compared to similar options, like home equity loans or personal loans. That said, because HELOCs use variable rates, the interest rate will change based on certain benchmark rates and the current market. This, along with the amount of money you’ve spent using the line of credit, will determine your payments.
Although Pennymac does not currently offer HELOCs, we are available to answer any questions you have about how they work or what your other options are. Don’t hesitate to get professional advice. Contact a Pennymac Loan Expert to determine just what you should be doing with your home equity.
How to Qualify for a HELOC
To qualify for a HELOC, you will need a sufficient amount of equity in your home, a good credit score and low debt-to-income (DTI) ratio. Here are some tips to help you start the HELOC process and increase your qualification chances.
Start Building Home Equity
Since you usually need at least 15-20% home equity to qualify for a home equity line of credit, start prioritizing increasing the value of your home. You can build your equity by making slightly larger payments on your principal balance for your current mortgage. You can also consider refinancing your existing mortgage into a shorter-term mortgage.
Know Your Credit Score and History
Your credit score affects your eligibility for a HELOC, similar to when you were a first-time homebuyer applying for a mortgage. Most lenders require a credit score between 580 and 620, although that is ultimately dependent on the type of loan you choose and other qualifying factors.
Decide Why You Need the Funds
You don’t want to be casual with your HELOC spending, so be specific and intentional with borrowing by having a plan in place. While you may use a HELOC to have flexible on-hand funds, that doesn’t mean you should be careless. Set boundaries from the beginning on what you can and can’t spend these funds on, how often you want to make payments, etc.
People often use a HELOC to pay for home renovations, debt consolidation, education and special events, like weddings.
Do Your Research
Talk to multiple lenders, compare rates and benefits and read reviews. Look for a credible lender who is upfront about fees, timelines and other expectations. When deciding who to work with, it’s important to carefully evaluate the HELOC’s fees and terms and the lender’s reputation.
You’ll also want to know the following:
The length of the draw period, i.e., how long you’ll be able to access the funds
The period of time you’ll have to pay the remaining balance after the draw period ends. Sometimes terms can be 15 years and you may have a steep payment.
Is the interest rate fixed once you can no longer access the credit line
Understand Typical Contracts and Look for Fees
Understand the terms of your HELOC agreement. Are there prepayment penalties that prevent you from paying off more of your credit during the draw period? Is there a minimum amount you have to take out, and does it make sense to take out that much with your financial goals? Are there annual fees? What about application fees? Make sure you know the overall cost before signing a contract.
Know Your Debt-to-Income Ratio (DTI)
The debt-to-income ratio is the percentage of your monthly income that goes toward your current debt. Keep in mind that you can only have so much debt before lenders no longer consider you eligible. Paying off debt is a good way to show lenders that you know how to manage your money. Having too much debt, especially compared to your income, will indicate to lenders that you can’t sustain a line of credit with interest. Lenders typically look for your DTI ratio to be less than 43-47%. Reach out to a licensed loan officer who can help you figure out where you stand.
What Can You Use a HELOC For?
Essentially, homeowners can use a HELOC for whatever they need to, though it’s not wise to use these funds for nonessentials or day-to-day expenses. HELOC funds are best used for the following:
Home improvement. Home improvement is one of the best uses of HELOC funds. From renovations to additions, projects that increase the value of your home also help contribute to your home equity. Plus, there are potential tax deductions for certain home improvement projects.
Emergency funds. If you find yourself without a job or facing other emergencies, HELOCs are a good source of revolving funds that can be carefully managed, even in the draw period. Because interest doesn’t accrue on unused funds, you can use and pay off only what you need.
Debt consolidation. Though you should be careful not to generate more unnecessary debt, you can use a home equity line of credit to consolidate current credit card debt. Instead of dealing with high-cost credit card loans, you switch to a low-cost line of credit.
Medical bills. Medical bills can add up quickly, especially for unexpected or ongoing health concerns. People often take advantage of the low cost and low interest rates of HELOCs for these types of health expenses.
Education costs. Some people also use a home equity line of credit to pay off student loans or pay for tuition, especially because HELOC interest rates can be lower than student loan interest rates.
How Much Can You Borrow?
Even if you have substantial home equity, most lenders only allow you to take out some of what your home equity is worth.
Typically, you can use up to 85% of your home equity value, though it could be less depending on your financial history and other personal qualifications. Factors that influence your overall eligibility, how much you can borrow and the interest rate you may qualify for include:
Credit score and credit history
Current debt
How much home equity you have
Reliable income
Payment history
How to Pay Back a HELOC
A home equity line of credit is paid back with interest on whatever you take out of your revolving funds. However, HELOCs have a unique two-phase repayment method. These two phases are the draw and repayment periods, though the names can be misleading since you will make payments during both periods.
Phase 1: The Draw Period
The first phase is the draw period. This is when the credit line is open and your funds are available to use.
During the draw period, you can borrow funds as needed and only have to make minimum payments, or sometimes even interest-only payments for what you have borrowed. However, funds aren’t limitless; they’re revolving. If you hit the limit of available funds, you’ll need to pay back some of the money before you can continue borrowing.
The draw period is usually between 5 and 15 years. Some borrowers, like investors, commonly take out the maximum amount of funds and pay it off several times over. More commonly for homeowners, HELOCs can just be paid in minimum payments. Any other payments made on the principal loan during this time will lessen the amount you have to pay back during the repayment period.
Phase 2: The Repayment Period
Once your draw period is over, the repayment period begins when you must make recurring monthly payments. You also can’t take anything more, as access to the home equity line is closed. Payments will vary depending on whether or not you paid any interest during the draw period and how long each period is. Since most HELOC loans use variable interest rates, how the rate changes also affects payments.
Minimum payments may become significantly larger if you choose interest-only payments, so even if you have an interest-only payment option during the draw period, consider both the current and future financial consequences. These two periods aren’t necessarily split evenly, either; a 30-year HELOC loan is common, with a 10-year draw period and a 20-year repayment period.
It’s important to know when your draw period ends and when your repayment period begins so you can properly prepare. If you aren’t prepared to adjust financially, it’s tempting (or necessary) to open other lines of credit to pay what you owe on the HELOC, which can bury you in debt. It’s also possible to refinance if you aren’t ready to or don’t want to enter the repayment period when it arrives.
Pros and Cons of a Home Equity Line of Credit
HELOCs are a great way to put the money sitting in your home to work, but there are both pros and cons that homeowners should be aware of. Not every scenario calls for a HELOC loan, so consider the following benefits and drawbacks.
Advantages of a HELOC
Lower upfront costs. Compared to home equity loans, HELOCs tend to have lower upfront costs, which may help a homeowner decide what type of cash-out option they prefer.
Low or no closing costs. There are typically no closing costs for HELOCs. If there are closing costs, they are very low.
Lower interest rates. Traditional credit cards tend to have higher interest rate fees, but HELOCs generally offer lower interest rates. This makes consolidating debt a bit easier.
Interest is charged sparingly. Interest accrues only on funds that you actually use. You may have $200,000 available, but if you’ve only used $20,000, interest is applied just to that 10% utilized.
Flexibility. Because you don’t have to pay interest on more than what you’ve taken out, homeowners have much more flexibility and opportunity with their spending. You’ll have affordable funding options if something unexpected pops up or a project costs more than anticipated. You can use it for what you need, even for education.
Tax deductions. In some instances, the government allows homeowners with HELOCs a tax deduction for interest payments. Please consult your tax advisor regarding the tax benefits of HELOCs.
Disadvantages of a HELOC
Minimum draws. Some lenders require you to use a certain amount of the equity funds for their own benefit. Even if you end up not needing the minimum, you still have to take out and pay back (with interest) that money. Most lenders also charge an inactivity fee if the account isn’t being used.
Upfront costs. Though lower cost than other loans, HELOCs may still require application fees, home appraisal costs and other procedures. Consider the upfront expenses and determine if they’re worth the funds you would have access to.
Variable interest rates. Variable rates can go up and down depending on the market and federal lending rate, which can affect your monthly HELOC payments. When they are low, it’s great for borrowers, but high-interest rates can take a toll.
Fees. Without properly vetting a lender, you may find yourself stuck with unexpected or overwhelming fees such as cancellation fees, application fees, annual fees and prepayment penalties.
Potential credit damage. If you are unable to make payments, as with any loan, your credit score will take a hit.
Risking your home. Remember, your home is the collateral. If a homeowner mismanages their funds, misses payments and ultimately defaults when the repayment period rolls around, they could lose their home.
Attraction to nonessentials. Having large amounts of available funds can be freeing, but some homeowners struggle to use their funds only for essential or intentional spending, which can lead to greater debt that’s harder to pay off. HELOCs are not meant for day-to-day expenses like a regular credit card.
The Difference Between a Home Equity Loan and Line of Credit
HELOCs and home equity loans are similar in that they are both loans that use the value of your house as collateral and tend to have lower interest rates. However, there are some key differences.
What Is a Home Equity Loan?
A home equity loan is a form of consumer debt that allows you to borrow money against your home’s equity. The loan is paid separately in addition to your first mortgage which is why a home equity loan is often called a “second mortgage.” The following are some of the main differences between a home equity loan and a HELOC.
Lump sum payment. Home equity loans aren’t a revolving source of funds like HELOCs are. Instead, homeowners still use their home equity funds, but are given the money as a one-time lump sum.
Fixed interest rate. Unlike a home equity line of credit, home equity loans usually come with fixed interest rates. A fixed interest rate also means a fixed payment — you’ll know exactly what you are going to pay every month regardless of what’s going on in the market.
Prepaid interest costs and closing costs. With a home equity loan, you may have prepaid interest costs that you’ll have to sometimes pay at closing time. You also usually have to pay 2-5% of the loan amount in closing costs, whereas a home equity line of credit doesn’t often have closing costs.
Home equity loans are often used when borrowers need a big sum of cash for a one-time expense. If you need more flexibility, a HELOC loan lets you acquire funds as needed. If you know exactly what you need the money for and prefer fixed payments, a home equity loan is probably best.
HELOC Alternative: Cash-Out Refinancing
HELOCs are flexible and offer a lot of freedom, but they aren’t for everyone. If homeowners don’t want to take out a second mortgage, there are other options like cash-out refinancing.
What Is Cash-Out Refinancing?
A cash-out refinance is a new “first” mortgage that replaces your original mortgage with a new one through refinancing. Unlike the original, a cash-out refinance allows homeowners to borrow cash that they can use as needed. The new mortgage loan will be higher than the old one, and the difference between the loan amounts is distributed directly to the homeowner.
Cash-out refinancing allows you to maintain just one mortgage rather than two while still getting the immediate cash you need. These also offer fixed rates, which some people prefer for consistency.
How do you decide between a cash-out refinance and a HELOC? Determine whether you’d like to replace your current mortgage to get the cash you want (cash-out refinance) or add a second mortgage to get that cash (HELOC). For help understanding which could be the best fit for your needs, talk to a Pennymac loan expert.
HELOC Rates
Most often, the interest rate on a HELOC is variable. Variable rates come with pros and cons, and they are largely dependent on the current market and economy. Your eligibility will also affect the kind of rate you qualify for. Rates usually start lower at the beginning of the loan, or in this case, at the beginning of the draw period.
However, the rates will change based on benchmark interest rates, which can lower or raise your payments in both HELOC phases. Still, many lenders offer caps so that your interest rate won’t exceed a certain percentage. This is especially important to look for in a contract and consider as you’re trying to decide on a lender or on applying for a HELOC.
Also consider that HELOCs are a type of second mortgage, and generally speaking, rates for second mortgages are higher because the lender is taking on more risk.
HELOC FAQs
Here are some of the common questions many homeowners have regarding home equity lines of credit.
How Does Home Equity Work?
Many people want their home equity to work for them instead of being stagnant. That’s why HELOCs, home equity loans and cash-out refinance options exist. Homeowners should understand that though home equity refinancing can be helpful, you’re putting your home at risk if you aren’t properly prepared for the payments. Done correctly, though, home equity can be a great alternative source of funds and debt management.
How Can You Use Your Home Equity?
You can use your home equity loan for all sorts of reasons, as long as the lender hasn’t set certain limitations. Some lenders do limit what the line of credit can be used for, so it’s always best to discuss such limitations with lenders before signing anything. Also remember that funds shouldn’t be used for nonessentials or like a traditional credit card. Most often, people use HELOC loans to add value to their home through home improvement, to pay off extensive bills or expenses or to consolidate their current debt to get a better rate and lower costs.
Can You Pay Off a HELOC Early?
As long as the lender sets no prepayment penalties, you should be able to pay off a HELOC early, even in the draw period. The more you pay off during the draw period, the less you’ll have to spend during repayment. If, for example, the variable interest rate is relatively low during the draw period, you could pay the interest plus a little extra on the principal balance. Again, some lenders will penalize you for paying more than the required minimums, so learn about the lender’s prepayment policies.
How Long Does the Closing Process Take for a HELOC?
Closing a home equity line of credit usually takes 1-2 weeks. However, it can take up to 4 weeks to get everything settled, and even after that, you may have to wait several days or weeks before accessing the available funds. It all depends on the appraisal process, documentation timeline and the lender’s underwriting process.
What’s the Difference Between a HELOC and a Home Improvement Loan?
The main difference between a HELOC and a home improvement loan is how you receive the funds. HELOCs allow borrowers to take out smaller amounts of money depending on how home projects change and evolve. Home improvement loans are also limited to specific home projects, whereas HELOCs can be used outside the home for any purpose.
Is a HELOC Right for You?
A home equity line of credit can be a great solution for established homeowners who need more flexible spending options. If funds are used carefully, for the right reasons and through a reliable lender, borrowing against your home equity is a viable option for many.
However, a home equity loan may be a better option if you could benefit from a lump sum of immediate funds and prefer fixed interest rates and predictable monthly payments. To learn more about turning your home equity into cash in hand, speak with a Pennymac loan expert today.
Buying a home in the U.S. often involves weighing the trade-offs between a 15-year and 30-year mortgage. With the interest rate staying constant, the first option has higher monthly payments, but the loan is repaid sooner than it is with the second option that offers lower monthly payments.
But home loan borrowers in the U.K., Canada, Australia and most European countries have a wider array of choices: They can break up their loan tenure into smaller chunks of two, three, or five years, and get lower interest rates as their loan size reduces and credit rating improves over time.
A new research paper by Wharton finance professor Lu Liu, titled “The Demand for Long-Term Mortgage Contracts and the Role of Collateral,” focuses on the U.K. housing market to explain the choices in mortgage fixed-rate lengths by mortgage borrowers. She pointed out that the length over which mortgage rates stay fixed is an important dimension of how households choose their mortgage contracts, but that has “not been studied explicitly thus far.” Her paper aims to fill that gap.
Liu explained that the U.K. market is “an ideal laboratory” for the study for three reasons: It offers borrowers an array of mortgage length choices; it is a large mortgage market with relatively risky mortgage loans similar to the U.S.; and it offers the opportunity to study market pricing of credit risk in mortgages. In the U.S. market, the pricing of credit risk is distorted as the government-backed Fannie Mae and Freddie Mac provide protection against defaults. “The U.S. is a big outlier in mortgage structure. It has essentially removed credit risk in the markets for long-term contracts.”
How Beneficial Are Long-term Mortgages?
At first sight, long-term mortgage contracts may seem preferable because they have a fixed interest rate, and thus allow borrowers to protect themselves from future rate spikes, the paper noted. “Locking in rates for longer protects households from the risk of repricing, in particular having to refinance and reprice when aggregate interest rates have risen,” Liu said. “In order to insure against such risks, risk-averse households should prefer a longer-term mortgage contract to the alternative of rolling over two short-term mortgage contracts, provided that they have the same expected cost.”
But in studying the U.K. housing market, Liu found that there is an opposing force that may lead some households to choose less protection against interest rate risk. This has to do with how the decline of credit risk over time affects the credit spreads borrowers pay. She explained how that occurs: As a loan gets repaid over time, the loan-to-value (LTV) ratio decreases as households repay the loan balance and house prices appreciate, the paper noted. This reduces the credit spread that households pay on their mortgage over time. When high-LTV borrowers decide to lock in their current rate, the credit spread will account for a large portion of that rate.
“[30-year mortgages] have had knock-on effects on mobility and housing markets due to mortgage lock-in.” – Lu Liu
As the LTV ratio declines and collateral coverage improves over time, they raise the opportunity cost of longer-term contracts, in particular for high-LTV borrowers, Liu noted. “Locking in current mortgage rates [protects] households against future repricing, but it also locks in the current credit spread, leading households to miss out on credit spread declines over time.”
High-LTV borrowers, or those who opt for low down payments and bigger loans, have to initially pay large credit spreads that can be as high as 220 basis points higher than what a borrower with prime-grade credit would pay. But refinancing with shorter-term contracts allows them to reduce those credit spreads over time. “They’re not locking in to a rate over 30 years; they’re probably locking in at shorter terms of two, three, or five years, and they do it maybe six or seven times,” Liu said. Riskier borrowers with higher LTV ratios hence face a trade-off, as locking in rates while the LTV is high is relatively costly, so they end up choosing shorter-term contracts, meaning they choose less interest-rate protection than less risky borrowers.
“In markets where the credit risk is priced using market prices – without government intervention as in the U.S. — the credit risk is expensive as lenders charge relatively higher rates for that,” Liu said. “If I’m a risky borrower, I face this very difficult trade-off: I want to insure myself like everyone else. But it also means that I’m locking in relatively high rates, with a big credit spread.” That of course does not always make sense for borrowers, she pointed out. “This may help explain why very long-term mortgage contracts with high-LTV mortgage lending are rare across countries.”
Liu said her data, which covered the period from 2013 to 2017, showed that the propensity is lower among riskier borrowers to opt for a 5-year fixed-rate mortgage compared to a 2-year fixed-rate mortgage. The higher the loan-to-value ratio, the lesser was their incentive to choose longer mortgage tenures, her research found. “Borrowers at 95% LTV are less than half as likely to take out a 5-year fixed-rate contract, compared to borrowers at 70% LTV,” the paper stated. The findings help explain the “reduced and heterogeneous demand for long-term mortgage contracts.”
How to Make U.S. Mortgages More Efficient
Liu said the findings in her paper are relevant for mortgage market design. “High-LTV borrowers face a difficult trade-off between their demand to lock in overall interest rate levels, and an expected decline in credit spreads over time,” she said. “Households could benefit substantially from being able to lock in base interest rates, while repricing their credit spreads.”
The findings are important also from both a monetary policy and financial stability perspective, Liu continued. “High-LTV borrowers are more exposed to interest rate risk, which can also cause vulnerabilities in a rising rate environment, since these borrowers may be most affected by mortgage cost increases.”
“There is political resistance to institutional change and borrower resistance to novel mortgage products.” – Lu Liu
The findings of Liu’s research are also timely, given the recent spike in the inflation rate. She noted that the U.S. Federal Reserve has increased interest rates more aggressively than its counterparts in the U.K., Canada, and Australia. All those countries have varying degrees of short-term fixed or variable-rate mortgages. Unlike in those countries, U.S. mortgage borrowers are “relatively shielded from interest rate rises, as the vast majority of households have locked in previous low rates for 30 years,” she noted.
Unintended Consequences of Long-term Mortgage Contracts
But the design of mortgage contracts in the U.S. creates disruptions beyond the housing markets to the broader financial system. “The 30-year fixed-rate mortgages in the U.S. have led to duration mismatch and financial stability risks in the banking sector, as rate rises have reduced the market values of these loans and mortgage-backed securities,” Liu said. She cited the recent collapse of Silicon Valley Bank as a case in point, which was triggered by the fall in the valuation of its bond holdings in a rising interest rate environment. In the U.K., in contrast, banks typically hedge the 2-to 5-year fixed-rate legs of mortgages using swaps, with the remaining part of the contract having a variable rate and thus not causing duration mismatch for the banks.
Long-term contracts have other consequences, too. “The [30-year mortgages] have had knock-on effects on mobility and housing markets due to mortgage lock-in,” Liu continued. Mortgage lock-in occurs in a rising interest rate environment, where homeowners find it a losing proposition to refinance mortgages they had taken out when interest rates were at historical lows. As a result, “people aren’t moving, and the housing market is frozen,” she said.
Liu said policy makers ought to rethink the 30-year fixed-rate mortgage, noting that Harvard economics professor John Y. Campbell had proposed that in a presentation at the Georgia Tech-Atlanta Fed Household Finance Conference in March 2023.
That said, the nature of mortgage systems in different countries is “highly persistent over time,” so any recommendation to radically change them might be far-fetched, Liu noted. “There is political resistance to institutional change and borrower resistance to novel mortgage products,” she added. If the U.S. were to move in the direction of more of a Canadian system that has mortgage rates fixed for five years, she noted, “any implementation of shorter-term fixed-rate contracts would need to take into account the credit risk dimension, which could result in risky households insuring less against interest rate risk.” Such a move has the potential to make monetary policy more effective and the banking system more stable, but further research is needed, she added.