Best Mortgages: How to Find Them
Buying a home is a big commitment — and for many, a mortgage is a decades-long investment and a significant part of their monthly budget. There are many mortgage options on the market, and what’s right for your neighbor or family member may not be the best choice for you.
In general, this translates to the loan with your best possible terms, but there are many factors to consider specific to your current financial situation and your long-term goals. Before you make an offer on a home, it’s important to shop around with different lenders and determine how much you can really afford.
- Where to shop for mortgages
- What type of mortgage is best for first-time homebuyers?
- Fixed-rate vs. adjustable-rate mortgages
- Choosing the best mortgage for your needs
- How to compare mortgage offers
Where to shop for mortgages
It has never been easier to compare mortgage options online, especially on sites like LendingTree, which lets you potentially compare rates from several lenders at once.
As mortgage rates continue to creep upwards, we’ve found that the spread between the lowest rate offered by lenders and the highest rates offered is growing as well. Interest rates have been on the rise in 2018, and although the market is always in flux, rates are currently higher than they were three years ago.
A recent LendingTree Mortgage Rate Competition Index found that rate shopping could save homebuyers nearly 10% of their total loan amount in interest. For example, on a 30-year, $300,000 loan, the potential savings translates to $26,404.
That just makes it even more important to shop around and compare rates to get your best deal. Comparison shopping can save you a significant amount in interest over the life of your loan.
You can also shop for mortgages online at many lenders’ websites today. If you already do business with a certain bank, ask if they have a pre-qualification tool online. Just be sure to go beyond your own bank, because you never know what other options are out there if you don’t look.
What type of mortgage is best for first-time homebuyers?
There are plenty of loan options for first-time homebuyers, but sussing out which mortgage is best for you can be tricky.
It’s important for prospective buyers to have an in-depth conversation with multiple lenders who will complete a thorough review of the borrower’s income, assets, and credit profile. This allows borrowers to see specifically what they’re qualified for with that lender and compare with other options before moving forward.
Like any other borrower, first-timers should speak with multiple lenders, compare rates, and review all options to determine which offer best fits their long-term financial goals. Here are some of the types of loans available to new homebuyers.
Federal Housing Administration (FHA) loans have looser credit standards than other mortgages and require down payments as low as 3.5%, which is why they are generally considered an ideal option for first-time homebuyers — especially those who can’t afford a large down payment or have poor credit.
To be eligible for an FHA loan and a 3.5% down payment, you must have a credit score of at least 580. Borrowers with scores between 500 and 579 have to put 10% down. These loans must be used for the borrower’s primary residence, and the amount you can borrow may be limited. However, because they are backed by the government, FHA mortgages often have lower rates than other loans.
One caveat: With an FHA loan, you’ll pay a mortgage insurance premium (MIP) both upfront with your closing costs and as an ongoing annual amount paid monthly. Unlike other types of insurance, this doesn’t protect your investment — rather, it allows the FHA to insure loans for riskier borrowers. An upfront MIP is a fixed cost equal to 1.75% of your loan amount, while payments collected monthly will vary as your loan-to-value (LTV) ratio changes.
Although insurance premiums may make an FHA loan more expensive than other options, the smaller down payment and more accessible eligibility requirements can offset this for first-time buyers.
VA home loans
If you’re an active-duty service member, veteran, or eligible spouse, you can apply for a mortgage backed by the Department of Veterans Affairs. Like FHA loans, VA mortgages are actually made by private lenders and insured by the government. The advantage for eligible first-time homebuyers is that no down payment is required — however, there is a funding fee that ranges from 1.25 to 3.3% depending on your type of service, your down payment amount, and whether you’ve had a VA loan before.
Conventional home loans
Conventional mortgages are backed by private insurers, like Fannie Mae and Freddie Mac, and generally require borrowers to have better credit and a lower LTV ratio than loans insured by the government. If you have a credit score of 700 or above, you’re more likely to be approved for a conventional home loan, although some lenders will accept scores in the 620 range.
Unlike an FHA loan, a conventional mortgage doesn’t require insurance if you make a down payment of at least 20%. If you’re a first-time buyer with a solid credit history and cash to put down, a conventional loan may be less expensive in the long run than a government-backed mortgage.
Other loan options
Conventional, FHA, and VA loans are some of the more common mortgage options for first-time homebuyers, but there are several alternatives to consider for specific types of purchases. The U.S. Department of Agriculture (USDA) offers 0% down loans for low- to moderate-income buyers in rural areas, while the Department of Housing and Urban Development (HUD)’s Energy Efficient Mortgage helps buyers of older homes finance energy-efficient improvements. The FHA’s 203(k) loan provides up to $35,000 for repairs if your dream home is a fixer-upper.
Fixed-rate vs. adjustable-rate mortgages
With a fixed-rate mortgage, you’ll pay the same interest rate — and monthly payment — over the life of your loan. While some fixed-rate options will charge extra upfront to make up for lower rates over an extended period of time, they are more predictable for buyers who plan to stay in their homes long-term.
Adjustable-rate mortgages, on the other hand, have interest rates that vary with the market. This means that you may start out with a low, manageable rate but end up paying a higher rate years into your loan. For example, with a 7/1 ARM, you’ll pay a fixed rate for the first seven years. From then on, your rate will change once per year. If you plan to be in your home for only a few years and can secure a low rate upfront, an ARM may make sense for you.
Choosing the best mortgage for your needs
Having detailed conversations with lenders who are familiar with your financial situation and goals is a good way to determine which type of mortgage is best for you. When doing so, buyers should ask a number of questions.
How much do I have to put down?
As described above, not all loans require a large down payment — or any money down at all. It’s a common myth that buyers must put 20% down. In fact, just because you can afford this upfront doesn’t mean you should.
“Sometimes putting less money down is a better option because as you buy a home, there are things you have to do — furnish it, install a washer/dryer, put up blinds — and it’s better to have more money in the bank to cover some of those costs,” said Bill Banfield, executive vice president of capital markets at Quicken Loans.
What is my monthly payment?
After you have been preapproved by your lender and submit your mortgage application, you’ll receive a three-page loan estimate that details your expected interest rate, monthly payment, and closing costs. Before moving forward, make sure you can comfortably afford this expense in your budget relative to what you currently pay.
“The most common comparison is going to be ‘What is my total monthly payment compared to what I pay in rent?’’ Banfield said. “This gives me perspective on whether I’m comfortable where I am and whether it’s cheaper to own than rent.”
What credit score is required?
Some mortgages are better options for buyers with lower credit scores, but a lender can help you determine how your credit affects your rate and whether there are any steps you can take to improve before moving forward with a loan. You may be eligible for a better offer — and save money over time — with a higher score.
How does my lender service my loan?
Banfield says it’s important to know how your lender will help you solve problems that arise or work with you when you need help. A loan servicer manages the day-to-day administration of your loan, such as payments, insurance, and fees, and is also your primary contact on these issues. Oftentimes, a lender will issue a loan and then immediately sell it to a loan servicing company, who will be your point of contact from then on. Some lenders service their own loans, but it’s worth asking this question upfront and doing some research into the loan servicing company they use if any.
How to compare mortgage offers
Get preapprovals from at least three lenders.
A preapproval is when a lender reviews your credit history and your financial documents and offers you a rate based on that information. If you get preapprovals from several different lenders, you can easily compare the terms side by side.
An even better way to compare offers is to get a loan estimate from three lenders. Loan estimates are given to borrowers after the underwriting process is complete and offer the best estimate of your loan terms. Loan estimates come in a standard form regardless of the lender, so looking at your options side by side should be straightforward.
When comparing mortgage types and offers, it is important to consider the interest rate, monthly payment, and additional costs for each option.
Where it gets complicated is when a lender has lower rates but higher fees, for example — you should always look for prepayment penalties, mortgage insurance costs, rate lock periods, and other differences between lenders.
Banfield stresses that this is where buyers should look beyond the estimates on paper and get to know their lender. A mortgage is a big step, so you want to make sure you trust who you work with.
“You’re going to spend 30 days in process in origination, but most first-time homebuyers will have a 30-year mortgage and a long relationship with that lender,” he said.
A mortgage is a long-term commitment, so whether you are buying your first home or your fifth, take your time to find your best deal you can on a loan and a lender that meets your specific needs.