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- Interest rates are an important factor when shopping for a mortgage, but you should consider additional expenses before choosing the loan with the lowest rate.
- Many lenders require private mortgage insurance if you have less than 20% for a down payment — but lenders that portfolio their loans might not charge PMI.
- Ask for an itemized list of fees from different lenders, then compare apples to apples.
- When choosing between a fixed-rate and adjustable-rate mortgage, think about which one makes more sense for your long-term goals.
- Policygenius can help you compare homeowner’s insurance policies to find the right coverage for you, at the right price »
Mortgage rates in the US are at historic lows right now, making it a potentially great time to buy a home. While there’s no denying that interest rates are important, you may not want to choose a mortgage based on interest rate alone.
Kevin Parker, Vice President of Field Mortgage at Navy Federal Credit Union, pointed out that APR isn’t the only cost you should consider when shopping for a mortgage lender. You should also think about private mortgage insurance, various fees, and loan terms.
1. Consider a lender that doesn’t require PMI
Private mortgage insurance (PMI) is a type of insurance that protects your lender should you stop making payments. Many lenders require PMI if your down payment is less than 20% of the home value.
According to insurance-comparison website Policygenius, PMI can cost between 0.2% and 2% of your loan principal per year. If your mortgage is $200,000, you could pay an additional fee between $400 and $4,000 per year until you’ve paid off 20% of your home value and no longer have to make PMI payments.
You aren’t necessarily doomed to pay PMI if you don’t have a 20% down payment, though. Not all mortgage lenders require PMI for every type of loan.
Parker explained that Navy Federal Credit Union doesn’t require most borrowers to get PMI because the credit union portfolios half its loans.
“What that means is, we may sell some of our loans in the back end to Fannie Mae, like a lot of lenders, but we also hold onto 50%,” Parker said. “That give us more flexibility and allows us to be more creative in offering certain loan products.”
By finding a lender that portfolios its loans, you may be able to avoid paying PMI.
It’s still possible that a lower rate will save you more money in the long run than opting out of PMI will. It depends on how much lower the rate is from one lender to another, and how long you would make PMI payments should you enroll. Take time to crunch the numbers.
2. Ask for an itemized list of fees and compare charges across lenders
Parker said that if his own mother was buying a home, he’d give her one main piece of advice: “You want to be sure you’re able to itemize each individual fee.”
“We’re going to give you a loan estimate, which is the official document that basically itemizes all of the fees on that loan,” he continued.
When you receive loan estimates from your top lender options, you can compare the fees from lender to lender.
Parker said you can typically request a closing cost estimate before officially submitting an application. The estimate will be generalized, because steps such as a home appraisal won’t have happened yet. But the estimate will still give you an idea of what fees the company charges.
Once you’ve chosen the home you want to buy and are ready to apply for a loan, the lender will do a hard inquiry on your credit report and provide an official loan estimate that is more detailed.
When you have loan estimates from multiple lenders — either the closing cost estimate or the official estimate — you can compare origination fees, appraisal fees, underwriting fees, and anything else a lender might charge.
3. Pick a loan term that matches your financial goals
Parker suggested borrowers consider their financial goals when choosing between a fixed-rate mortgage and an adjustable-rate mortgage, or ARM.
A fixed-rate mortgage locks in your rate for the duration of your loan and typically comes with a 30-year, 20-year, or 15-year term. Fixed-rate mortgages are safer bets than ARMs because your rate never changes, and they can be a good option if you plan to stay in the home for a long time.
With an ARM, your rate stays the same for a few years, then changes after a given amount of time. For example, a 7/1 ARM locks in your rate for the first seven years of your mortgage, then changes once per year. Most lenders offer a 7/1 and 5/1 ARM, and some have more term options.
ARMs are riskier than fixed-rate mortgages, because your rate increases or decreases along with market mortgage rates. However, ARM rates are typically lower than fixed-rate mortgage rates for the first few years, so if you plan to move out soon, an ARM could be a better deal financially.
Parker gave a 3/1 ARM as an example. “If they know that they might not be in that property three years from now, they may want to take advantage of a 3-year ARM, which gives you much better interest rates,” he said.