Evaluate mortgage options before rates rise
While economists across the nation debate whether the Federal Reserve will raise interest rates this year or wait until 2016, many homebuyers are taking advantage of a brisk housing market to purchase homes now and lock in a mortgage rate at levels that remain historically low. Although the Fed does not directly control mortgage rates, the rate it sets for banks’ own borrowing tends to quickly affect the mortgage rates banks offer to customers.
Generally, mortgage rates in the U.S. are under 4% for 30-year fixed loans, and less than 3% for 15-year fixed, depending on the amount of your down payment, and with a good credit score.
For buyers, the combination of low rates and the fall season, which is usually slower than spring or summer, may be an ideal scenario. Home sales in Wisconsin remain strong overall, with an increase of 11.1% in September, compared to sales in September 2014, according to the Wisconsin REALTORS Association (WRA). The report also noted that sales were robust in every region of the state and are on pace to reach the highest annual volume since 2005.
If you are in the housing market, it’s important to know your financing options and to be prepared to act quickly when you find that perfect home.
Determine how much you can afford — Talk to mortgage lenders to help you decide how much you can borrow and how much you should spend for a home. They are not necessarily the same. For example, just because a lender will give you a loan of $250,000 doesn’t mean you should borrow the full amount. You should consider the cost of the mortgage along with your other monthly expenses and your overall financial goals, a point especially important for first-time homebuyers.
Develop a relationship with a lender — Online loans might appear to be a simple choice but the mortgage process is complicated. Working with a local lender can not only streamline the process but also might pay off with such added benefits as a better rate on your savings account or help with your overall financial planning.
Get pre-approved for a mortgage — If your financing is in place, your offer for your dream home might be accepted more quickly or instead of another offer from potential buyers who do not yet have approval. Among common types of mortgage loans:
- Fixed rate — These loans have the same interest rate and level payments for the entire term of the loan, usually 15 or 30 years. The benefit of a fixed-rate mortgage is that the homeowner will not have to contend with loan payments that fluctuate with interest rates. A 15-year fixed mortgage will carry a lower interest rate and slightly higher payments but builds equity more quickly because early in the loan term, more than half of each payment is applied to principal, compared to about a third for a 30-year loan.
- Adjustable Rate Mortgage (ARM) — Also known as a “variable-rate mortgage” or a “floating-rate mortgage,” interest rates on these loans can move up and down as interest rates fluctuate. Most have an initial period during which the borrower’s rate can be less expensive than for fixed-rate loans and doesn’t change, followed by a longer period when the rate changes at preset intervals, often every month. The interest rate will be based on a benchmark plus an additional spread, called an ARM margin. It can get expensive but there are caps, depending on specifics of the loan. The most common ARM is the 5/1, in which the lower introductory rate lasts for five years, followed by a year of varying rates; other common ARMs are 3/1, 7/1, and 10/1. ARMs can be beneficial for buyers who plan to stay in a home for only a few years or for those who want to take advantage of low rates for a specific period of time.
- VA Home Loans — Veterans have access to the Federal VA Home Loan Program, which provides numerous benefits. Issued by local banks and other lenders, VA Home Loans are guaranteed by the federal government and can be obtained with low or no down payment. There are no income restrictions and you will not need mortgage insurance. VA Home Loans also can be combined with other state and local loan assistance programs.
- Federal Housing Authority (FHA) — This type of loan, designed for low- to moderate-income buyers, is a mortgage insured by the FHA, a government agency within the U.S. Department of Housing and Urban Development. Borrowers pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan. They can be granted with a down payment as low as 3.5% with a credit score of 580 or higher. Borrowers with lower credit scores would need a 10% down payment. However, two mortgage insurance premiums are required on all FHA loans. The upfront premium is 1.75% of the loan amount, payable when the borrower gets the loan. It can be financed as part of the loan amount. The second is the annual premium, although it is paid monthly. It varies based on the length of the loan, the amount borrowed, and the initial loan-to-value ratio, and can range from 0.45% to 0.85%.
If you are hoping to take advantage of current low interest rates, understanding your options, advance planning, and working with a lender to maximize your buying power can help you reach your dream of home ownership — or help you buy that dream home.
Jim Kubovec is area sales mortgage manager for Wisconsin Bank & Trust, Member FDIC and Equal Housing Lender. NMLS#553208
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