Why Program is More Important Than Interest Rate

Why Program is More Important Than Interest Rate

Purchasing a home and selecting a mortgage is one of the biggest financial decisions most people will make. Many potential buyers, especially first-time home buyers, mistakenly believe that finding the lowest interest rate is the most crucial aspect of securing the best mortgage possible. There are several aspects of mortgages, loans, and interest rates that individuals need to understand to make the best decisions possible when buying a home

What, Besides Interest Rates, Affect Home Buying Costs?

While interest rates are important, several other aspects of buying a home will affect your long-term costs.

• Initial Costs: Some lenders will require a home appraisal and a home inspection. You'll also likely have to pay for a credit report, title search, and a processing fee.
• Closing Costs: There are several fees to consider. These include title company costs, application fees, administration fees, and possibly attorney costs.
• Loan Terms: These include more than the closing costs and interest rate. The monthly payment, length of the loan, and whether you have a fixed or adjustable rate will affect how much you ultimately pay for your home.
• Homeowners Insurance: Sometimes homeowners insurance is a requirement and may be lumped in with your monthly mortgage payment.
• Property Taxes: While this isn't part of the mortgage, this is an ongoing cost you'll pay even if your home is paid for. These costs are based on your home's value.

What are Interest Rates?

Interest is how much you're going to pay to borrow money. An interest rate for a mortgage is how much a lender will charge you to borrow money. This extra charge for borrowing the money is combined with the mortgage in a sum you'll pay each month.

Lenders will each have slightly different criteria that will determine what interest rate you will pay. Most, however, will take into consideration the same factors. These will include credit reports, credit scores, income, length of steady employment, and current interest rates. Some lenders will put more emphasis on some factors than others.

What are Mortgage Programs?

Mortgages are agreements between a lender and a buyer that allow people to purchase a home or investment property. For home mortgages, there are generally two types; 15-year loans and 30-year loans. Interest rates will almost always be higher on a 30-year loan because they are longer, and there is more time for the borrower to default.

There are generally five types of mortgage programs. 

• Conventional Mortgage Loan: These are for borrowers with an above-average credit score. Conventional loans are either conforming or non-conforming. Conforming loans meet the standards of the Federal Housing Finance Agency (FHFA). You can use conventional loans for most types of mortgages and investment properties. Borrowers will need to have a higher FICO score and a higher down payment than most government loans.
• Fixed Rate Mortgages: These mortgages provide a predictable monthly payment for the entire loan, no matter how interest rates fluctuate. This makes it easier to budget overall expenses throughout the duration of the loan. If interest rates go lower, you'll have to refinance your mortgage to obtain the lower rates.
• Adjustable Rate Mortgages (ARM): Your adjustable rate mortgage has an interest rate that fluctuates with the market. Some ARM programs will have a fixed rate at the beginning of the loan and then switch to a variable rate after several years. These usually work best if you don't plan to stay in your home long. The biggest risk with an ARM is if interest rates go really high, payments may become unaffordable. 
• Jumbo Loans: This is for home buyers with excellent credit hoping to secure a larger loan. These are for those who can buy an expensive home. Jumbo loans are more common in higher-cost areas of the country, such as San Francisco and New York City.
• Government-Backed Loans: The United States government isn't technically in the mortgage business, but there are agencies that back and support loans for eligible Americans. The U.S. Department of Agriculture (USDA), the U.S. Department of Veterans Affairs (VA), and the Federal Housing Administration (FHA) each support various mortgages. Government loans help those without a down payment and a lower credit score. Loan limits are usually lower than conventional mortgages. You also can't cancel mortgage insurance without refinancing into a conventional loan.

What are 5 Examples of Programs Available?

The following are several programs that potential home buyers may want to consider. Each program has different options that can potentially save you money regardless of your interest rate.

Fannie Mae/Freddie Mac: These are the big home mortgage lenders. They normally work with local lenders to provide a wide range of programs and products for potential homebuyers. Fannie and Freddie offer several types of loans for potential homebuyers with different credit scores. They offer loans that allow borrowers that have built 20 percent equity to end their mortgage insurance. The Home Possible loan from Freddie Mac is a program that allows a 3 percent minimum down payment.

USDA: These are mortgages available to rural homebuyers. The United States Department of Agriculture introduced these loans in 1991 for low to moderate-income homebuyers who often would not qualify for other types of mortgages. The primary benefit of these loans is that they don't require a down payment and often have low-interest rates.

FHA: Federal Housing Administration (FHA) loans are generally available even for those with credit scores in the 500s. If your credit score is lower than 580, you'll need to put 10 percent down. Higher scores may only require as low as 3.5 percent down. In 2022 maximums for loans were ranging between approximately $420,900 to $970,800. It's important to note that FHA loans do require a homebuyer to have mortgage insurance. You can pay a premium upfront with your closing costs and as part of each monthly payment.

VA: You may qualify for a loan from the Department of Veterans Affairs if you're a veteran, a service member, or a surviving spouse. Many of these programs don't require mortgage insurance or a down payment. There aren't standard income or credit requirements set by the VA. Each VA lender will determine their requirements.

Terms to Know

You will want to know the following terms regarding mortgages, home loans, and interest rates. 

Amortization: This refers to paying a loan off over time with regular payments. Nearly all mortgage loans amortize, with the amount decreasing after each payment. You'll still owe money on some loans even after making every payment.

APR: Annual Percentage Rate (APR) is an interest for the whole year. Your APR combines the interest rate, mortgage fees, and other charges you may pay to receive a loan.

Balloon Loan: These are loans with a larger than usual payment, normally the last mortgage payment.

Closing Disclosure: This is a form providing details about your individual mortgage.

Credit Report: A credit report is an official statement regarding your credit activity, including how promptly you have paid previous loans and credit cards.

Credit Score: There is a scoring model that different companies use to give you a score. Lenders will use this score to determine your eligibility for loans and mortgages.

Earnest Money: This is money a home buyer will deposit, demonstrating "good faith" on a contract that is already signed. A third party normally holds the money.

Equity: Equity is the amount your home is worth minus any mortgage still left on the house.

Home Appraisal: This is a written document showing how much a home or property is estimated to be worth. 

Loan Modification: A modification is a change in your loan terms. This might include changing the number of years on the loan and your monthly payment.

Mortgage Refinance: Refinancing is taking out a completely new loan to replace the old one.

PITI: These are the four elements of a monthly mortgage payment. This includes principal, interest, taxes, and insurance.

Total Interest Percentage: TIP is the amount you receive when adding all interest payments and dividing this by the loan amount. This is the amount of interest you'll pay over the course of the loan.

5 Tips When Considering Mortgages and Interest Rates

Keeping a few basic tips in mind can make the process run smoothly.

• Start saving for the three primary costs as soon as you consider buying a home or property. These include the down payment, closing costs, and moving expenses.
• Check your credit score and get free credit report copies from TransUnion, Equifax, and Experian.
• You'll want to explore all your mortgage options by reviewing sites such as Review My Mortgage.
• Always stay well within your budget when obtaining a mortgage. Unexpected costs often come up during the process.

No matter what type of mortgage you're hoping to secure, it's crucial to take the time to do plenty of research before starting. Finding the right loan that meets your personal needs and goals means considering that the mortgage program is just as important as the interest rate you obtain. This will help make your home buying experience a successful one!

Keywords: mortgage, loans, program, interest rate