If you haven’t taken advantage of the current historically low mortgage interest rates, today is the time! Quite frankly, there isn’t much downside risk in the long term bond market (that’s the market that generally determines mortgage interest rates, not the “prime” rate) but there is some significant upside risk. What that means is that rates can only go so low, and we’re just about there, if not already.
I recently saw a 3.60% 30 year fixed rate mortgage on my Credit Sesame goals page. If I was open to a variable rate, a 5/1 adjustable rate loan is now at 2.82%. Just, wow …
Your home, and thus your mortgage (if you have ,one), is a key factor in your quest for financial freedom and unless you have the right kind of mortgage – a 15 or 30 year fixed rate mortgage with payments you can afford – achieving financial freedom will be much more difficult.
Why I believe a fixed rate mortgage is best
There are no surprises with a fixed rate mortgage. You know exactly what your payments are going to be for the entire life of the loan and you pay down principal with every payment, reducing the amount you owe and building equity every month. The only variables with your payment are your property taxes and your homeowners insurance. So my recommendation is if you plan to be in your home more than seven years and you have anything but a fixed rate mortgage under 4.5% — especially if you have one of those adjustable-rate deals that have gotten so many people in housing trouble — then you should refinance NOW. Rates are at historic lows as but it won’t last forever.
The best place to start mortgage shopping is online. First, go to a website like Lending Tree or Quicken Loans to see what mortgage lenders are offering. Even if you wind up using a traditional mortgage lender or bank, at least you’ll be armed with some knowledge after going through one of those guys (I’ll be moving in a few months and you can bet I’ll be using Quicken Loans for MY mortgage).
What you need to know about refinancing
Lending standards are much tighter than they used to be, but if you can meet the requirements, most banks will be happy to refinance your mortgage. The three basic criteria are:
- Your credit score. You’ll generally need a score of at least 620 to even be considered for a loan—and at least 740 to get the best interest rates. To get your real credit score, head over to myFico.com. It is critical to know your score and you need to know the REAL one. FICO is the score that all lenders use so don’t waste your time on all the others.
- Your debt-to-income ratio, or DTI. Mortgage lenders want your DTI to be less than 38%. That is, your monthly mortgage payments shouldn’t total more than 38% of your monthly pre-tax income.
- Your loan-to-value ratio, or LTV. Most lenders now demand that no mortgage be greater than 80% of the value of the home – meaning the total amount you owe on your house should be no more than 80% of what the house is worth. (For example, if your house is worth $200,000, lenders will not finance or refinance a mortgage for more than $160,000.)
When you compare mortgages, take special note of the annual percentage rate (APR), whether the lender is charging you “points” up front (you don’t want this), and what the closing costs will be (including fees for appraisals, title search, title insurance, credit reports, etc.). Another fee to be aware of is the “origination fee.” This is simply a fee for processing the mortgage paperwork.
There WILL be fees associated with getting your mortgage, but the key is to know what these fees up front so you can make an informed decision and compare apples-to-apples. Fees are simply how the mortgage company gets paid.
Waiting to refinance your home can be costly
Notice the difference in payment when all things are held equal:
So, if you have a mortgage interest rate that isn’t as low as the lowest of the rates in the above chart, consider refinancing with companies Lending Tree or Quicken Loans. And don’t forget to get your REAL credit score from myFico.com.