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Posted 07/06/2016

First-Time Home Buyers Guide: Choosing Your Mortgage Rate

Choosing the optimal rate for your mortgage

Choose Your Own Mortgage Rate

A mortgage is a loan made for real estate and 90% of home buyers will use them when purchasing a home.

The good news about mortgages is that they're abundantly available.

You can get a mortgage from a local bank, an online mortgage lender, or from a bank across the country. This means that -- as a consumer -- you can comparison shop home loans to your heart's content.

One comparison area for mortgage loan shoppers is the "mortgage rate".

Mortgage rates are the rate at which you pay interest on your mortgage loan. Rates vary between banks, and the bank with the lowest mortgage rate today may not be the bank with the lowest mortgage rate tomorrow.

However, because mortgage rates are used to calculate monthly payments, and the size of your monthly payment determines whether you can afford to purchase a home at all, the choices you make regarding your mortgage rate will be among the most important choices you make as a buyer.

Note that there is no such thing as a "good" mortgage rate or a "bad" one -- there are only mortgage rates which work (or don't work) for you and your financial needs.

Click to see today's rates (Jul 23rd, 2016)

Your Loan Choice Will Affect Your Mortgage Rate

Mortgage rates change all day, every day based on the U.S. economy and Wall Street forecasts for the future.

When economic forecasts are strong, mortgage rates tend to rise, broadly. Similarly, when economic forecasts turn weak, mortgage rates tend to fall, broadly.

As a home buyer, you can't control the economy, which means that you can't control ebb and flow of today's mortgage rates. However, you can control the smaller forces which ultimately determine the final rate quote you get from a mortgage lender.

One such detail is your choice of loan programs.

Mortgage loans are not one-size-fits-all and, depending on your needs, you may want to choose from any number of government-backed programs; or, programs available via private lenders.

You don't need to know which program is best today, but it can help to understand how each of your choices may affect your final mortgage rate.

In general, the lowest mortgage rates are made available to buyers using the VA Home Loan Guaranty Program. VA loans are backed by the U.S. Department of Veterans Affairs and are available to military borrowers only.

VA mortgage rates routinely beat other mortgage rates by 37.5 basis points (0.375%) or more. If you qualify for a VA loan, it's an option worth exploring -- especially because the program is no money down, upon request.

Another no-money-mortgage available to home buyers is the USDA loan.

USDA loans have similarly low mortgage rates when compared to VA loans, but USDA loans are only available in less-densely populated areas. This means that you cannot use a USDA loan to purchase a "city home".

USDA loans are widely available in rural and developing neighborhoods, and can be used in many U.S. suburbs. Be sure to ask your lender whether you're USDA home loan-eligible.

The next lowest mortgage rate is typically linked to the FHA mortgage program.

Backed by the Federal Housing Administration, FHA mortgage rates are only slightly higher than VA mortgage rates and the big draw of the FHA loan is that it allows borrowers with below-average credit to make a downpayment as small as 3.5%.

FHA loans require mortgage insurance, however, which can negate the program's low mortgage rates. If your credit score is at least average, then, make sure to compare the FHA loan to conventional loan mortgage rates.

Conventional mortgages, which include the low-downpayment Conventional 97 loan, feature the highest mortgage rates of all the above programs.

However, because private mortgage insurance can be less costly than with an FHA loan, and because private mortgage insurance is non-permanent, it can be wiser to accept the higher mortgage rate associated with conventional mortgage lender because -- long-term -- loan costs are more cheap.

Plus, you may qualify for the HomeReady™ mortgage, which is a conventional mortgage loan providing discounted mortgage rate and discounted mortgage insurance.

Your mortgage loan officer can help you choose between your available options.

Click to see today's rates (Jul 23rd, 2016)

Your Loan Traits Will Affect Your Mortgage Rate

Once you've selected a mortgage loan program, your mortgage rate will be subject to change based on the traits of your particular loan request.

For example, the size of your down payment, the length of your loan, and your choice to use a fixed-rate mortgage or an adjustable-rate one will determine your final mortgage rate, among other traits.

The size of your down payment

For borrowers using a conventional mortgage loan, the size of your down payment will affect your mortgage rate. In general, the smaller your down payment, the higher your mortgage rate.

Conversely, the larger your down payment, the lower your mortgage rate.

In general, every extra five percent in your down payment results in a mortgage rate reduction. There are no more discount once you've put thirty percent down on your home.

There are also no discounts provided to buyers using FHA, VA, or USDA financing.

However, do not feel like you need to make a large downpayment if you think it will hurt you financially -- there are plenty of low- and no-downpayment mortgages available in today’s mortgage market.

The length of your loan, in years

The number of years in your loan can also affect your mortgage rate. In general, the longer your loan's "term", the higher your mortgage rate.

For example, if you choose a 30-year mortgage term to finance your home, you should expect a higher mortgage rate as compared to a 15-year term. Sometimes, the mortgage rate difference is as high as 100 basis points (1.00%).

Choosing a longer loan term also affects your mortgage insurance payments, negatively. Borrowers with 30-year loan terms pay higher rates for mortgage insurance than borrowers with 15-year terms.

That said, 15-year mortgage loans aren't always best.

The payment on a 15-year mortgage can be 60% higher on a monthly basis as compared to a 30-year loan. And, for many home buyers, a payment of this size would make it difficult (or impossible) to get mortgage home loan-approved.

Talk with your lender if you're interested in a 15-year mortgage. Make sure you can manage the payments and stay within your budget.

Your choice between fixed-rate mortgage and adjustable-rate mortgage

Mortgages come in two varieties -- fixed-rate and adjustable-rate.

With a fixed-rate mortgage, your interest rate remains unchanged for the life of the loan. With an adjustable-rate mortgage, your interest rate can change, but only after a certain number of years have passed and only once per year.

The most common ARMs offer initial "teaser" periods of 5 years and 7 years.

During the initial teaser-rate for an ARM, mortgage rates are often lower than for a comparable fixed-rate loan. However, once an ARM enters its adjustments years, rates can move higher (or lower).

When choosing between a fixed-rate mortgage and an ARM, imagine your timeline in your new home.
If you expect that you will move within 7-10 years (or sooner), you may want to consider an adjustable-rate mortgage.

Your Choice To Pay Discount Points Will Affect Your Rate

As a mortgage borrower, after your loan type is selected and your traits are accounted for, there's one last option you can use to lower your rates -- you can choose to pay points.

Points, which are formally known as discount points, are a one-time fee paid at closing used to "buy-down" your mortgage rate. In general, paying one discount point will lower your mortgage rate by 25 basis points (0.25%).

For example, if your quoted mortgage rate is 4.00%, you can opt to pay one discount point in order to get a rate of 3.75%.

The cost of one discount point is equal to one percent of your borrowed amount such that one point paid on a loan at the 2016 mortgage loan limit of $417,000 would carry a cost of $4,170.

Discount points can also work in reverse.

Known as a "rebate", you can ask your mortgage lender for a higher mortgage rate than for which you might otherwise qualify and, in exchange, your lender will make a payment to you.

Rebates are used for zero-closing cost mortgages. In the above example, in exchange for taking a mortgage rate of 4.25%, the lender would pay $4,170 to you, to be used toward your closing costs.

Discount points can be tax-deductible so, if you choose to pay them, be sure to speak with your tax preparer.

What Are Today's Mortgage Rates?

When you're shopping for a mortgage, the economy sets the baseline. Everything else is based on you -- your loan choice, your down payment, your willingness to pay (or receive) points, and more.

Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Click to see today's rates (Jul 23rd, 2016)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2016 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)