Q. A large part of my monthly mortgage payment is the tax and insurance escrow, how is this account established?
A. An escrow account or sometimes referred to as an impound account, is established by a mortgage lender to collect and disburse tax and insurance payments. It is the mortgage lender’s decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. However, most all mortgage lenders require an escrow for loans that have less than a 20% down payment or a loan to value in excess of 80%. Certain government mortgage loan programs and secondary market sales of home loans will often require escrow accounts as a condition of the mortgage loan as well.
Mortgage lenders set up the escrow account to receive monthly payments from home buyers to then in turn pay for these obligations as they come due on the items such as annual insurance premiums, real estate taxes and assessments.
Mortgage escrow accounts work something like a forced savings account for the homeowner’s tax and insurance bill. The money to pay the annual property taxes or semiannual or in some cases, quarterly property taxes is deposited and saved in the escrow account that is managed by the mortgage lender or mortgage servicer and then disbursed by the mortgage lender on or before the tax and insurance due date. The money that is accumulated or deposited in the escrow accounts comes from a portion of the monthly mortgage payment made by the home loan borrower.
There are regulations that limit the maximum amount of funds that a mortgage lender can require a borrower to maintain in an escrow account. During the term of the home loan, RESPA rules prohibit a mortgage lender from charging excessive amounts for the maintenance of an escrow account. Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a mortgage lender may require the borrower to hold in an escrow account for the payment of taxes, insurance, etc. RESPA rules also require that the mortgage lender provide initial and annual escrow account statements.
The amount that needs to be placed in the escrow account initially and the amount of the monthly payments are determined by the cost of insurance and a tax assessment of the property. This amount will often fluctuate each year as insurance premiums rise or maybe fall and property taxes rise or may fall.
Each month the mortgage lender may require the home loan borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the mortgage lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year.
The mortgage lender is required to perform an escrow account analysis once during the year and notify the home loan borrowers of any shortage or excess funds ion the escrow account. Any funds held in excess of $50 or more must be returned to the borrower.
The process for calculating the mortgage escrow account starts with all the payment amounts or disbursements that will be paid out of your escrow account. This is usually the property tax bill and homeowner’s insurance bill. This total amount of insurance and taxes and other assessments if they apply are totaled up and divided by 12 monthly payments.
A trial running balance can then be calculated for the next 12 months listing all the monthly payments into the escrow account and all payments that the mortgage lender will pay out of the account when they are due. From this point, there is generally a time when the escrow account would reach a negative balance. In other words, when the first tax payment comes up there will likely not be enough money in the escrow account by simply adding then previous month’s monthly payments.
The next step is to increase the amount of money deposited so that all the monthly balances in the account, including the lowest point in the account, is at least zero so there is never a negative balance.
Finally, a reserve is added by the mortgage lender which may be added to the monthly balances. The escrow reserve amount may be a maximum of 1/6 of the total escrow charges.
When there is a deficiency in the escrow account which occurs because the mortgage lender has to use their own funds to pay a one of the disbursements, the home loan borrower will have to reimburse the mortgage lender. When the deficiency is less than one monthly escrow payment, the home loan borrower may have to repay the mortgage lender by adding to the next monthly payment to make up the deficiency in 30 days. If the deficiency is more than or equal to one monthly escrow payment, the mortgage lender may require the home loan borrower to repay the amount over a period of 2-12 months.
The annual escrow account statement summarizes all escrow account deposits and payments during the mortgage lenders or servicer’s twelve month computation year. The annual escrow account statement also notifies the home loan borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken.
Q. If I am concerned about getting approved for a mortgage loan, what should I do?
A. Of course, the first answer is to do your research. The number one way to help the mortgage loan approval process is to be prepared and understand how the mortgage loan process unfolds.
This may sound too simplified, but with the creation of credit scores and automated underwriting, the home loan approval process is based on the analysis of a series of numbers. Numbers such as, the amount of the down payment, the loan to value ratio, the borrower’s credit scores, debt to income ratios and more are all quantified and evaluated to come up with home loan approval or denial.
What is not included is subjective analysis. Number based assessments help to eliminate discrimination since color and race is not part of the input process. But, numbers can also hurt those borrowers that fell on tough times and are now putting their financial house in order. The mortgage loan approval and application is based on your debts, income, assets and credit at a point in time. Another words, you are approved or denied for a home loan based on your credit and income and other figures today, not where you will be tomorrow.
Mortgage lenders use an automated underwriting program, usually the one’s established by either FNMA of FHLMC, and input data about your current financial situation including your credit, income, debts and assets into these systems. Taking all the necessary information, the mortgage lender determines mortgage affordability. The key to any one individuals loan approval is be prepared and have the prettiest set of numbers for the mortgage lender to input in the automated underwriting system.
One of the most important numbers input or evaluated by the automated underwriting program is the borrower’s credit score. The credit score is one of the primary indicators of your ability to repay the mortgage loan, so it’s a good idea to know it before you apply with a mortgage lender. For the most part, if your score is above 760 you can expect to get the best mortgage rate a mortgage lender has to offer; if your score is below 660 you may have trouble getting approved until you improve your credit and credit score. You can obtain a free copy of your credit report annually at www.annualcreditreport.com.
Debt ratios are another key number quantified by the mortgage lender. Debt ratios are simply a measure of affordability. Debt ratios are measurements of affordability expressed as the percent of a borrowers income used to pay for debt. Mortgage lenders want to make sure a borrower’s monthly mortgage payment does not exceed 28 percent of their income before taxes. The mortgage lender will also look to see that total monthly debt payments including the mortgage payment, car payments and credit cards doesn’t exceed 36 percent of total gross monthly income. These two debt ratios are referred to as the front end and back end ratios in the mortgage industry.
Do the math calculations on your own with one of the mortgage calculators to see how your debt ratios stack up against these guidelines. The web site, www.selectcalculators.com is great site for mortgage calculators. If your proposed housing expenses or monthly mortgage payment is greater than 28% and total debt payments, car loan, student loans and other loans, is greater than 36 percent of your gross income, you may have trouble qualifying for new home loan. In tight situations, you may want to see is if there is a way to reduce some of those monthly debt payments before you apply for a home loan.
The down payment, assets and loan to value are all related measurements. The loan to value measure the loan amount in relation to the value of the home. An 80% loan to value mortgage equates to a home loan that 80% of the home’s value. For a purchase transaction, which would mean the borrower is putting 20% down or a 20% down payment.
The assets the mortgage lender is evaluating are the funds held by the borrower needed to cover that down payment, closing costs and reserves. The reserves are a measure of funds left over after paying for down payment and closing costs as a cushion or safety net. At least two months reserves will be mandatory. This is defined as two months worth of monthly mortgage payments. More reserves will make the home loan approval easier. Once again, the mortgage calculator and a look at your own finances can tell you where your loan to value will be as well as the number of months of monthly mortgage payments you have in reserve.
All of these numbers, debt ratios, credit scores and loan to value are evaluated by the mortgage lender via the automated underwriting program. The better any of the numbers are the easier the home loan approval process will be. Really high credit scores will be approved with less paperwork than lower scores. Larger down payments are processed faster. Low debt ratios will facilitate the approval process as well.
In a perfect world you want to save for a large down payment, improve your credit score and lower your debt-to-income ratio. But, in light of that, you may simply want to know where your weak spots are regarding these factors and see what you can do to improve on them before you apply for new mortgage loan. This is a good rule whether you are applying for a purchase or a mortgage refinance.
Q. How do I find the best mortgage lender?
A. The most important step in the process of finding the right mortgage lender is to do plenty of research. Unfortunately, most consumers will spend more time shopping and comparing the price of a new television set than they do shopping for a mortgage lender.
When shopping for the best mortgage lender is not only important to shop around and compare mortgage rates and costs, it is equally important to investigate the mortgage lender and their services. It’s important that you find a mortgage lender who will work with you to meet your needs and who you feel comfortable with and gives you a feeling of trust. This will entail comparing rates, services and competence.
It’s not that difficult to choose a good mortgage lender, but you do have to be informed and know what you are looking for in a mortgage lender. In order to shop and compare mortgage lenders, you need to fully understand what you are searching for not what they are selling. In order to understand the product, a prospective home loan borrower has to learn about the mortgage loans available, the average mortgage rates, the costs and the terminology involved in the mortgage loan process. With the knowledge of how the mortgage loan decision making process works, a mortgage shopper can better compare mortgage lenders and question the services and products offered.
Above everything else, do your homework before the application process begins. To find the right mortgage lender a consumer will have to question the mortgage lender and loan officer and this will be difficult to do without some understanding of how a mortgage loan is originated, processes and closed.
Once you, as the potential home loan borrower, understand the mortgage loan types and the process involved, its time to quiz the mortgage lender and mortgage loan officers. The first thing to find out is how knowledgeable the mortgage loan officer is about the home loan options and equally important, how well they explain the process and any potential pitfalls to a smooth home loan closing. The mortgage lender or mortgage loan officer should explain the mortgage rate lock process, the mortgage payments, the loan term, when and if you can refinance again and more.
Which mortgage lender has the best mortgage rate will certainly be a consideration. Of course, it is important to discuss mortgage rates and closing costs. This is a big ticket item and the mortgage rate can have a significant impact on the total costs of the loan. Comparing mortgage rates fortunately is fairly straight forward process.
Go online and check the prevailing mortgage rates in your area for the home loan product you are most interested in. Use these mortgage rates as a starting point to compare the mortgage rates of lenders you call and measure how competitive their mortgage rates really are. Don’t choose a mortgage lender based on mortgage rate alone. Make sure the mortgage lender is competitive with their mortgage rates but be sure to investigate the costs and service as well.
Comparing closing costs can sometimes get fishier. Some mortgage loan officers remain intentionally vague about the total closing costs. Other mortgage lenders employ loan officers that just don’t know that much about what they sell. In these cases it may be wise to move on. A representative of any mortgage lender should be able to explain the mortgage costs with great detail. That means they should explain any origination points, the costs of the appraisal, the title insurance costs, the cost for processing, the credit report, the tax service fee and any other fees the mortgage lender will be charging.
Not only should a good mortgage lender explain these costs, they should be able to explain what they are and why you are being charged the corresponding fee. Once you have chosen your mortgage lender and submitted a home loan application, get a Good Faith Estimate in writing itemizing approximate mortgage costs and fees. Pay close attention to all the figures on the Good Faith Estimate.
You should know, up front, how the mortgage lender will evaluate your application. Have the mortgage lender explain the mortgage loan process and the how they come to approve your home loan request all the way up to how and when they set up the mortgage loan closing or settlement. When you speak with the mortgage lender they should explain the automated underwriting process, the verification process, the documents needed by you to support the down payment and your income as well as how long this process should takes.
While the mortgage lender briefly explains the process, find out how accessible they will be while your home loan application is being evaluated and underwritten. With all the transactions now taking place on line including mortgage origination’s, a face to face application or consultation is not necessary with a mortgage lender but you should at least be able to contact your loan officer by phone or email regularly. Some customers can be annoying but the job as the mortgage loan officer to help you get a home loan. You want to be assured it will be easy for you to monitor the status of your mortgage loan application and be able to ask questions along the way.
A final step should be to ask for references. As good mortgage loan officer should be able to immediately provide references of satisfied customer’s even customers that they are presently working with.
In a nutshell, to choose a good mortgage lender you want to research the products they offer and the mortgage rate, the level of service in handling a home loan application from beginning to end and the reputation of the mortgage lender. Mortgage lenders who understand mortgage rates and costs and the whole loan process are most certainly going to be a very knowledgeable and resourceful mortgage loan officer who has not merely a salesman. Be sure to choose a company that gives helpful advice and that makes you feel comfortable.
Q. What is Private Mortgage Insurance and why do I need It?
A. PMI is an acronym for private mortgage insurance also referred to as simply mortgage insurance. PMI is a type of insurance that covers the lender on the event you default on the loan. It is generally required on loans that have high LTV’s or low down payments. Mortgage lenders will normally require private mortgage insurance on home loans that have a loan to value greater than 80%. The loan to value or LTV is measured by taking the loan amount divided by the property value or for a purchase it can also be measured by taking 100% minus the percentage of the down payment. For example a home loan purchase with 10% down payment has a loan to value of 90% or a home loan that is for $75,000.00 on a home that is appraised at $100,000.00 has a 75% loan to value.
The private mortgage insurance covers the mortgage lender but will have top be paid by the home loan borrower as part of their monthly mortgage payment. Private mortgage insurance was established to help home buyers that had less than 20% for down payment. The insurance company absorbs a portion of mortgage lenders losses in the case of default and foreclosure for those home loans with private mortgage insurance that have less than 20% down. Without the added insurance, the mortgage lender would not make the home loan unless the down payment was at 20% or greater.
The private mortgage insurance cost is a reflection of the mortgage loan amount, the type of mortgage loan and the loan to value. The higher the loan amount is relative to the home’s value or the LTV, the greater the private mortgage insurance cost will be. This may seem fairly obvious, the less equity in the home the more the risk to the mortgage lender and therefore the higher the insurance costs.
Higher private mortgage insurance costs due to larger loan amounts is not necessarily a measure of risk but simply a higher cost since private mortgage insurance is priced as a percentage of the mortgage loan amount.
The mortgage loan type can change the private mortgage insurance costs since some home loans have a slightly higher risk of default. The best example for this is adjustable rate mortgages. A higher loan to value, low down payment, adjustable rate mortgage is more risky than a 30 year fixed rate mortgage loan and therefore has a higher private mortgage insurance cost.
Two avoid private mortgage insurance you have to have a 20% equity in the property. Either 20% or more for a down payment on a purchase or for a refinance, the loan to value can not exceed 80%. Stated another way, the new home loan can not exceed 80% of the property value for either an existing mortgage refinance or home purchase.
Some mortgage lenders allow customers to put down less than 20% to avoid PMI by taking two mortgage loans. This is accomplished by obtaining a first mortgage for 80% of the property’s value and a second mortgage loan for 10% of the property’s value. This is commonly referred to as 80-10-10 loan since the first mortgage is for 80% loan to value, the second represents 10% loan to value and the third 10 represents 10% down payment from the borrower. At one point mortgage lenders also allowed 80/20’s in which the borrower obtained two mortgage loans that together were 100% of the value of the home. The 80/20 is pretty much extinct and the 80-10-10 is very difficult to find.
Mortgage insurance is usually set up as addition to the monthly mortgage payment. A standard monthly mortgage payment includes principal and interest as well as taxes and insurance. The insurance usually refers to the homeowners insurance. A loan with private mortgage insurance will have added insurance charge for the private mortgage insurance costs. A change in private mortgage pricing in the past five years set up to alleviate the tax differences between the tax deductible costs of private mortgage insurance and the interest on second mortgages is something called lender paid PMI.
In these situations the mortgage lender covers the cost of the private mortgage insurance and there is no added costs at the home loan closing or added to the monthly mortgage payment. However, the mortgage lender absorbs this added cost by raising the mortgage rate on the home loan to compensate their costs for the private mortgage insurance. This increase in the mortgage rate to cover additional costs is the same technique used in no point / no closing costs mortgage loans in which the mortgage lender raises the mortgage rate to absorb the mortgage loans’ closing costs.
Q. Should I pay points to get a lower mortgage rate?
A. Paying points may or may not be your best option, depending on what your objective is. Mortgage points, whether they are called discount points or origination points, should make the interest rate on the home loan lower. Generally speaking, the more mortgage points that a loan has, the lower its interest rate should be. Alternatively, you can lower the points paid at closing by accepting a higher mortgage rate.
Most mortgage lenders usually will offer mortgage loans with points and without points. Even when a mortgage lender markets a mortgage rate with points, call the lender and see what the mortgage rate would be without points, sometimes mortgage lenders will not market all their mortgage rate and point options.
Now, some home loans have points attached or charged as a customary method of offering the home loan. FHA loan are the most common example. Most FHA mortgage rates are priced with one point origination fee. It doesn’t mean it is necessary, it’s just customary.
The amount of points you want to or ought to pay, should include evaluating how much cash you have available and the length of time you expect to hold the mortgage. Once you shop and compare mortgage rates and are confident you have the necessary funds to cover the costs of additional points to obtain a desirable and competitive mortgage rate you should compare mortgage rates with points and without. After comparing the mortgage rate difference and the cost differences, the only way that it will be cost effective to take the home loan with points is if you hold the loan long enough to recover the added costs of the points.
As an example, today Bank of America offers a 30 year fixed rate mortgage for a purchase in Illinois with a rate of 5.250% and 1.375 points. The bank also offers a no point option with a mortgage rate of 5.625%. The monthly mortgage payment with points for a $280,000.00 home loan will be $1,546.17. The home loan monthly mortgage payment with zero points is $1,611.84 or a difference of $65.67 per month. Since the cost difference between the two loans is the dollar value of 1.375 points or $3,850.00, the amount of time it takes to cover the costs of paying points will be 58.63 months. The additional points will take almost 5 years to recoup. In this case, it is hard to see the value in paying the points.
A final consideration is the future movement of interest rates. When mortgage rates head lower, refinancing activity increases. If in the above example, mortgage rates drop shortly after closing on the home loan it fairly easy to calculate the cost savings with a new mortgage loan at a lower rate. For instance, if mortgage rates fall to 5.125% on a no point loan, the monthly mortgage payment drops by $87.26. If the closing costs are approximately $2,205.00 (actual data extracted from Bank of America’s web site) the refinance will take 25 months to recoup.
The quandary arises when the loan originally accepted has points. Refinancing that loan means the value of the points are flushed away. The borrower will have paid the original closing costs and the points only to have an opportunity to refinance again without recovering the points already paid. Of course, this is only significant should mortgage rates drop low enough to make refinancing a worthwhile transaction. Guessing the direction of interest rate is certainly a task that is above my pay grade and most every mortgage client I have ever had.
Points paid on a home loan for a refinance can be deducted from your taxes as they are amortized or in increments, 1/30th a year for a 30-year mortgage, for example. Mortgage points paid for a home purchase are a tax deductible expense for that year. Consult a tax advisor for individual situations and details.
Q. What happens when you change the mortgage loan amount after the loan application is with the mortgage lender?
A. Generally this is not a big problem when the loan amount is altered by small amounts, but it will depend on a number of variables of which one may be significant. Mortgage loans are almost entirely approved or denied based on automated underwriting systems or programs or AUS. The two biggest are FNMA’s Desk Top Underwriter and FHLMC’s Loan Prospector program.
Once a home loan application is preliminarily approved that is an indication it has been submitted through one of these programs. The loan approval takes only minutes but the data entry and processing leading up to the approval may take an hour or more. Once the home loan is submitted the automated system will generate an approval with conditions or findings that need to be satisfied for final loan approval. The conditions usually involve items and procedures such as employment and income verification and supporting documents such as current paystubs or asset documentation. The key is that the mortgage loan request is approved based on several numerical factors such as the applicants credit score, debt ratios, income and assets not subjective judgments performed by an individual.
Altering the loan amount after the initial input in these automated underwriting systems is relatively easy. Once a mortgage loan request is entered into one of the automated underwriting programs the loan request can be altered multiple times without recourse. Each alteration does not change the credit profile or cause another inquiry into the applicant’s credit report. The credit score doesn’t change due to a higher loan amount nor does the applicants job or income. If an increased loan amount is not accepted it does not invalidate the prior approval amount and conditions.
Raising the home loan amount is most often a minor change that impacts the debt ratio slightly as well as the LTV or loan to value. It would also be easy to see that a loan increase of $3,000.00 on a $200,000.00 loan request is not going to raise the mortgage payment very much and therefore will have very little impact on the debt ratios. This can be verified by running your own mortgage payment calculations on a mortgage calculator. Therefore, unless the debt ratios are very tight the most significant factor in determining the outcome of increasing the loan amount is the loan to value.
This leads to the conclusion that for home loans that are already approved, raising the loan amount slightly should be relatively easy. It requires some simple data entry changes into the original approval request with the automated underwriting system and viola, a new loan approval.
However, if the loan request is for a home purchase, the loan amount change may very well be changing the down payment and the loan to value significantly. A home loan for 180,000.00 on a $200,000.00 purchase that changes to a $182,500.00 loan amount involves a fairly measurable change to the LTV. The original home loan request calls for a down payment of $20,000.00 or 10% of the purchase price which is equivalent to a 90% loan to value home loan. By raising the loan amount by only $2,500.00 the loan to value is now over 90% (91% or $182,500.00 / $200,000.00). Home loan requests that may alter the LTV above the minimum accepted level are likely not to be approved.
The first step to solving the question of whether your mortgage loan request can be increased is to run the loan figures on a mortgage calculator so you know how the loan amount changes are impacting the mortgage payment and debt ratio. Next, speak to the loan officer or mortgage lender and ask for their input. For a refinance it is fairly common for the loan amount to be changed. Underwriting considerations may prevent the mortgage lender from raising the loan amount but there is no downside to asking. If the credit, income and collateral allow room to change the mortgage loan amount, it should a fairly simple process.
Q. What does it mean to float a rate?
A. Mortgage rates changes daily and in especially volatile markets they can change during the day. Floating or floating the rate is when you have put in a mortgage loan application for a home loan but the mortgage rate is not locked or set at a specific rate but rather floats and may vary with the daily market interest rate changes. While your mortgage rate floats, the interest rate on your home loan may go up and it may go down until the loan rate is locked. The mortgage rate must be locked prior to the closing date but it can float either by request of the loan applicant or because the applicant is ignorant about how mortgage loans and mortgage rates function. Of course, the mortgage payment will change as the mortgage rate changes.
The opposite dynamic of floating the rate is to lock the mortgage loan rate. When this happens the interest rate is fixed for that loan request for a predetermined period of time. The home loan should be settled or close during the time period covered by the loan lock or the loan lock is of no value. The loan lock can be performed at the time of the home loan application or anytime up to a few days prior to the home loan closing.
A mortgage applicant may float their loan because they believe mortgage rates are headed lower. This can be risky business, but many mortgage applicants have guessed wisely and made the assumption that mortgage rates will drop between the time they place the mortgage application and the time the loan closes and in fact the mortgage rates do fall and that new mortgage loan borrower has a lower rate.
Unfortunately, some mortgage lenders do not inform their customers about mortgage rate locks and the potential home loan borrower’s mortgage rate is floating because of this intentional lack of disclosure. When mortgage rates suddenly rise, that borrower is now going to find that their mortgage rate is higher or perhaps more loan fees how been added to the closing costs to cover the costs of obtaining the original quoted rate that is no longer available in the mortgage market.
When a potential mortgage applicant is shopping and comparing mortgage rates it is important to discuss the rate lock with the mortgage lender. Be sure to discuss how long the mortgage rate is good for. Mortgage loan locks and rate floating applies to both purchase transactions and refinances.
When you discuss the interest rate on a mortgage loan with a loan officer of a mortgage lender or bank, part of the discussion that is often left out is how long that mortgage rate is good for. Many mortgage loan officers quote mortgage rates that are short term rates. The rate difference between a long term commitment and a short term commitment may not be very much but there is a discernible difference.
Mortgage rates generally have commitment time periods of 15 days, 30 days, 45 days, 60 days and sometimes longer. If a mortgage applicant is applying for a home loan that is due to close in 40 days, a mortgage rate commitment for 15 days is essentially worthless. Loan officers sometimes quote that 15 day commitment rate because it is cheaper either with a lower mortgage rate or lower fees and this draws the customer in. Remember, the loan officer is a salesman first. Later the loan officer tells the applicant they are not locked, hopefully at the time the home loan application is filled out but often they do not tell them until the loan is ready to close. If rates fall the borrower may get a benefit and if they rise they are in for an unpleasant surprise.
Q. What are mortgage points?
A. Points are fees charged by the mortgage lender or mortgage originator. Each point represents 1% of the loan amount. The points are charged as either general costs to obtain the loan or points to reduce the interest rate. The first example is generally considered origination points or fees and the later are considered discount points. Discount points are paid for a lower mortgage rate and origination points are charged by the mortgage lender for providing the home loan or originating the loan.
Often these loose definitions are meaningless. The important measurement is the mortgage rate and the total costs including points, whether they are identified as origination points or discount points.
If a prospective home loan applicant reviews two different mortgage lenders for a $100,000.00 home loan and one mortgage lender offers a 30 year mortgage at 6.00% and no points but with $1,800.00 in closing costs and another mortgage lender offers a 30 year mortgage with a mortgage rate of 5.75% with 2 points and $1,000.00 in closing costs, the assessment on the pros and cons of points gets complicated. Technically, the first mortgage lender is offering a home loan with an annual percentage rate (APR) of 6.167% and $1,800.00 in costs and a monthly payment of $599.55. The second mortgage lender is offering a loan with an APR of 6.024% and $3,000.00 in total costs and a monthly payment of $583.57.
The first mortgage lender’s payment is $15.98 more per month but costs $1,200.00 less to obtain the loan. The first lenders option has a higher mortgage rate and APR but the $1,200.00 difference in higher costs from the second mortgage lender will take approximately 75 months to recoup based on the monthly mortgage payment difference of $15.98 per month. Unless you plan to stay in the house a long time and mortgage rates don’t fall during that time, the first option is generally the better mortgage loan.
Q. When should I lock in the mortgage rate?
A. Nobody can predict the direction of interest rates. But historically, mortgage rates have had a tendency to rise faster than they come down. Once you have completed the mortgage loan application with a mortgage lender to buy a home or refinance your existing mortgage, you may want to lean towards locking in your mortgage rate earlier than later. You can always refinance later if mortgage rates drop again. Of course, every situation is different, so it’s important to consider all of your home loan options. Any future drop in interest rates and mortgage rates may not be significant enough to impact your monthly mortgage payment and make it worthwhile to refinance.
Timing mortgage rates is risky business; a sudden and sharp rise in mortgage rates may lead to a much higher monthly mortgage payment or in cases of tight debt ratios, lead to disqualification for the home loan for excessive debt ratio based on the now higher mortgage rates. For those mortgage applicants who want to time rates, make sure to pay attention to the bond markets. Mortgages are traded just like treasury bonds and the prices and rates are available online. 30 year mortgage rates will closely follow the movement in 10 year Treasuries. 10 year Treasury rates are displayed online, in a number of newspapers as well as on TV. It’s the direction of the 10 year Treasury rate that is important not the absolute value, mortgage rates are priced above Treasury rates. These rates will provide an indicator on the general direction of interest rates including mortgage rate but 10 year Treasuries don’t always follow or lead mortgage rates they are simply a very good indicator of how daily mortgage rates will move.