Finding the right mortgage for your new home purchase or refinancing your existing mortgage can be challenging. And it’s even more challenging in today’s climate with so much uncertainty and volatility.
Life has changed for many of us, and that includes changes to our financial circumstances and financial goals. It’s important to understand how today’s historically low mortgage interest rates — this week’s 3.15% for a 30-year fixed-rate was the lowest recorded since 1971 — might help you improve your financial circumstances and achieve those financial goals. Here are three things you should know:
#1: Prioritizing pre-approval for a mortgage
If you’re a serious homebuyer, the first step you should take is getting pre-approved for a mortgage. This is different from getting pre-qualified, which typically relies on self-reported information to help buyers know how much home they might be able to afford. With pre-approval, your financial information is thoroughly reviewed and verified, including your credit score, income, assets and debts. Pre-approvals require a few more steps, but they give buyers more confidence in their purchasing power.
In many markets, buyer demand for homes remains strong, due, at least in part, to low mortgage rates, and some homes are selling quickly, even receiving multiple offers. Pre-approval is especially valuable right now because it gives buyers the agility to move fast on properties they love. And having pre-approval can help a buyer’s offer stand out from competing offers.
#2: Deciding between adjustable-rate and fixed-rate mortgages
Mortgages are usually repaid over 10-year, 15-year, 20-year, or 30-year periods. With fixed-rate mortgages, your interest rate during that repayment period stays the same. Fixed-rate mortgages tend to be more popular because of the certainty around monthly payments — and borrowers don’t need to worry about their payments going up if rates rise. Note that the longer the duration of the loan, the lower the monthly payment.
With adjustable-rate mortgages (often referred to as ARMs), interest rates can change after an initial fixed-rate period, depending on the interest rate index. ARMs sometimes have lower interest rates for certain periods, but, because the interest can change, they are less predictable than the traditional fixed-rate option.
Which type of mortgage is best for you might depend on how long you plan to live in the home. If you think you’ll move in a few years, an ARM could result in more savings. That said, in the current environment, interest rates for fixed-rate mortgages and the initial fixed period for ARMs are roughly equal, so there’s less chance that ARMs will result in savings, and less incentive to take on the risk if the future rate increases.
#3: Monitoring lower interest rates amidst higher demand
Lower interest rates are motivating more buyers to enter the market and current homeowners to refinance. However, even though interest rates are low, access to financing has become a bit more difficult due to more stringent credit guidelines and additional documentation requirements. Many lenders, especially some of the larger banks, are requiring a credit score of at least 680 and a minimum of a 20% down payment to apply.
While it may be more difficult to secure a mortgage, it’s not impossible. If you are uncertain about what the best option is for you, you should reach out to a Mortgage Consultant and get expert advice for your specific situation.
https://www.opendoor.com/w/blog/mortgage-101 May 29, 2020 — Written by Nadia Aziz