Mortgage and Refinance Review
Why Mortgage and Refinance Online?
The top performers in our review are LendingTree, the Gold Award winner; CitiMortgage, the Silver Award winner; and Quicken Loans, the Bronze Award winner. Here's more on choosing a mortgage or refinance loan provider to meet your needs, along with detail on how we arrived at our ranking of these 10 services.
Purchasing a home will likely be the largest purchase you ever make and the one with the longest commitment. Finding the right mortgage from the best mortgage lender requires careful research and a thorough understanding of the loan process. Here, we explain the basics of mortgage loans and refinancing options: what you should do before you visit a lender, and what we uncovered when evaluating the top 10 mortgage and refinance lenders.
First-Time Mortgage Borrowers: The First Steps
Before You Go to a Lender
If you are buying your first home, it is a momentous occasion worthy of a celebration. However, before you go to a mortgage lender, you want to have a few things in order and understand the factors that affect the loan amount you receive and determine your interest rate.
Your credit is a factor, and it is something you have been working on your whole life. Excellent credit can get you a larger loan and better rates, but you may still qualify with good credit. Most mortgage lenders prefer a credit score of 660 or higher, but some lenders accept scores as low as 580.
Debt-to-income (DTI) ratio plays a part too. Most lenders like a DTI below 36 percent, but like your credit score, so many factors are considered that a high DTI ratio in itself will not likely disqualify you.
A down payment is good, if you can afford one, especially to keep your interest rate and monthly payments low. In an ideal scenario, you would have around 20 percent of the loan amount saved for a down payment. If a 20 percent down payment isn't feasible, you may be eligible for an FHA loan. With FHA loans, 3.5 percent is a common down payment. You will likely be responsible for closing costs (and other fees) when you complete your loan, so keep this in mind and decide if you can afford these additional costs.
Look into what current rates are for your price range and your area. You always want to understand the difference between interest rates and APRs as you will see both these figures and they always slightly differ. The interest rate is the cost of borrowing the amount of your loan while APR includes the rates as other costs, including fees, discount points and, occasionally, closing costs.
You can purchase discount points to lower your interest rate. Essentially, you pay for a lower rate by purchasing points from the lender to lower your interest rate before closing. Points can also be viewed as prepaid interest. Most lenders offer to sell between one and four points, and generally, one point is equal to one percent of the loan amount.
Finally, do some research and know how much home you can afford. You can find mortgage calculators online that estimate the loan amount you can handle based on your credit, income, debt-to-income ratio and other factors. After that point, you can start shopping lenders to see what type of loan you qualify for and which lender has the best offer.
What You Will Pay: PITI
Four main elements comprise your mortgage costs: principal, interest, taxes and insurance. Principal is the base amount of your loan – the amount you require to purchase your home. Interest is what you pay for borrowing the principal. Rates depend on several factors: the loan amount, your credit score and employment history. A portion of your monthly payment also goes to taxes and insurance. Most commonly, these two amounts are put into an escrow account until they are paid to the proper entities.
Refinancing Your Loan: When to Do It, When Not To
One of the most popular reasons to refinance your mortgage is to take advantage of current market rates that are lower than the rate you received when you took out your mortgage. A second reason is mortgage loan consolidations. If you have a first and second mortgage, you may be eligible to consolidate them, so you make a single monthly payment. Refinancing may also be an option after a marriage or divorce to change names on the mortgage and deed.
Keep in mind that when you refinance, you are essentially taking out a new mortgage, so you will likely be paying a new origination fee, closing costs and other fees.
There are times when refinancing is not a good idea. One reason is if you don't plan to be in your home for long. Because of the additional fees mentioned above, staying in your home may be the cheaper alternative. A second reason not to refinance is if you are upside in your loan and owe more than your home is worth. A HARP loan might be a good alternative if you meet the requirements, which include your mortgage being sold to Fannie Mae or Freddie Mac before June 2009. Look at our HARP Loans site for more information.
Types of Mortgage & Refinancing Loans
Fixed-Rate Mortgage: As its name suggests, a fixed-rate mortgage comes with a set interest rate over the life of the loan, which is typically 15 or 30 years for a first mortgage. The most attractive feature of a fixed rate mortgage is you can predict what your payments will be. Local taxes may affect your payment, but what you pay on principal and interest remains the same. The least-attractive feature is that your closing costs will likely be higher than with an adjustable rate mortgage.
Rates are always subject to change. If you receive your loan when interest rates are low, a fixed-rate mortgage will benefit you, because even if rates increase in the future, your rate will stay the same. The opposite is also true, however, that if rates go even lower, you are stuck with the higher rate unless you choose to refinance your loan, in which case, you'll pay additional closing costs and other fees.
Adjustable-Rate Mortgage (ARM): Adjustable-rate loans typically come with a fixed rate for a certain number of years, after which, the rate becomes adjustable. For example, a 5-year ARM comes with a fixed rate for five years and then the rates adjust and change over the remaining years of the loan, most commonly every year. All lenders are required to have a rate cap, which is the highest percentage your rate may increase to. This cap protects you from paying extreme rates.
Benefits of ARMs are your closing costs are typically lower and your initial fixed-rate period often has lower rates than a fixed-rate mortgage, though only temporarily. The downside is after the fixed-rate period ends, your rates will fluctuate to reflect the current industry rates, usually every year, so you cannot predict what your monthly payments may be for any future year.
The rates may flux higher than what you would have with a fixed rate, so the risk is you may pay more over the course of your loan. On the other hand, those rates may also drop below what you might have received for a fixed rate.
Federal Housing Administration (FHA) Loans: Often, first-time homebuyers don't have the credit or a sufficient down payment to qualify for a standard mortgage loan. So they take out an FHA loan. This type of mortgage loan is insured by the FHA and requires the borrowers to pay for mortgage insurance, protecting the lender from loss in case the borrower defaults.
With the mortgage insurance, you are responsible for two premiums. The first is an upfront premium payment. The second is the annual premium, which varies depending on the length of the loan and your down payment amount.
FHA loans can have fixed rates or adjustable rates just like traditional loans. The interest rates are comparable and vary depending on how you qualify, including your credit score and the down payment you can afford to put down.
The good that comes from an FHA loan is that many who would not qualify for a standard loan can become homeowners. Rather than come up with a large down payment, with an FHA loan, you may pay a much smaller percent of the total loan. You must have a good to average credit score to qualify for an FHA loan. If you aren't sure whether you meet the eligibility requirements, meet with a financial counselor to discuss your options.
Refinancing Loans: You have two choices for refinance: One option is rate-and-term refinancing, which entails refinancing the remaining balance on your loan to take advantage of lower interest rates.
The second option, cash-out refinance, is where you refinance your mortgage but for more than the remaining balance and keep the additional money. This may be a course of action if you need additional money rather than if you wanted to pay less each month.
Construction Loans: The borrower uses this type of loan to build a home. The borrowed amount starts a construction loan while the house is being built. Construction loans typically come with terms of one year and have higher rates than a standard mortgage loan. After construction is complete, you receive a certificate-of-occupancy and all contractors are paid. At that point, the loan rolls over to a standalone mortgage with standard loan rates depending on the type you choose.
A risk of these types of loans is that construction might cost more than expected. Typically, there will be ongoing inspections from the lender to determine the value and cost of construction.
Interest Only/Jumbo Loans: Less-common loan options include interest-only loans and jumbo loans. A jumbo mortgage loan exceeds the Office of Federal Housing Enterprise Oversight (OFHEO) conforming loan limits, which applies to loans over $417,000. These are higher-risk loans and typically come with higher interest rates.
Interest-only loans allow the borrower to only pay interest over a certain number of years – five or ten – rather than pay against the principal amount, which remains untouched during the interest-only period. After the predetermined period, the loan reverts to a typical mortgage loan where the borrower pays both interest and principal, meaning monthly payments will increase. You should avoid these types of loans if you cannot afford the higher payments after the interest-only period.
Elements of Your Loan You Should Understand
In essence, mortgage and refinance loans are both mortgage loans, so the process and eligibility requirements, rates, and fees are very similar. Here are some issues to consider:
Eligibility & Process
As discussed above, qualifying for a loan depends on many factors that influence your ability and likelihood to repay the loan. Mortgage companies look at your credit history and credit score. Your employment history is a factor, including your income, your current field and how long you've been with your current employer. Your monthly income is weighed against your monthly costs to determine what you can afford. Your income is further weighed against your total debt to see if you can afford your loan over the long term.
You need to provide all of your personal information, including income and employment. You will likely be required to provide two or three years' worth of tax returns. The company will pull a credit report and consider all of your information before determining if you qualify for a loan and the amount you qualify for.
Rates & Fees
With interest rates and APRs, as discussed above, many factors determine your rates, and they differ from lender to lender. LendingTree is a good place to start as it is a broker and searches through its network of lenders to find loan options for you. Then you can see the rates you qualify for. Keep in mind that rates for mortgage loans constantly fluctuate.
One option with mortgages is to have a fixed rate. While rate differences may seem relatively insignificant, a few percentage points can make an enormous difference over 30 years, so finding the loan with the lowest fees is important.
If you go the route of an adjustable-rate mortgage (ARM), companies should specify a rate cap, which is the highest your ARM rate may go. Some companies may also set a floor, which is the lowest you can expect your rate to drop.
You can expect to pay certain fees no matter which type of loan you choose. Origination and closing fees are standard, and while some companies may waive closing costs as an incentive, you cannot count on that generosity. Other fees may include an appraisal fee, which should be a third-party appraiser. Keep in mind that by law, lenders are no longer allowed to have in-house appraisers as they did in the past.
Some companies may charge a fee for loan maintenance, though not all do. Other services may charge a fee for early payoff, so ask the lender if they charge that fee. None of the companies on our lineup charge early payoff fees. However, some that waive closing or origination costs may expect you to pay them if you pay off your loan early.
Payments & Terms
The longer the term for a loan, the lower your monthly payments are, but also the longer you are paying interest. The most common term for a mortgage loan is 30 years, though you may be eligible for a 15-year loan depending on multiple factors. Other loan terms range from 10 to 40 years, but again, the average person will most often receive a set, 30-year loan.
Monthly payments include principal, interest, taxes and most insurance, or PITI, as discussed above. The first years of your loan, you are mostly paying down interest, so your mortgage balance will not drop significantly. In fact, you may only pay off a few thousand dollars of your principal amount the first five or 10 years of your mortgage, depending on your total payment, total mortgage and other factors.
What We Evaluated, What We Found
In our review of lenders, we contacted the companies on our lineup with different scenarios, representing typical borrowers searching for a mortgage loan. We presented a test scenario as a customer seeking rates for both a fixed 30-year and 5/1 30-year ARM mortgage.
We determined the knowledgeability of customer service representatives, the lender's transparency and willingness to divulge information, and the overall quality of our experience with the lender and its loan process.
Rates, Fees & Terms
Most companies were consistent in their advertised rates versus what we were quoted when we called in. We found that LendingTree offered a good range of rates for the mortgage refinancing industry. Quicken Loans also offers rates that are generally low for mortgage refinancing. For fees, we were impressed with the closing costs figures CitiMortgage and Ditech quoted us.
When considering eligibility, we looked at what companies prefer to see but also what they will likely accept. For example, the preferred credit score is usually around 660, but many companies accept lower scores. With your personal history, most companies prefer to see an employment history of a couple of years in the same field, but some companies will consider an employment history of only six months with a salary-paying career.
The application and underwriting process were additional factors we considered. On average, the entire process from start to finish takes around 30 days. This time varies depending on a number of factors, but Network Capital states its process can be completed in as little as 10 days and Bank of America in as little as 17 days.
Customer Experience & Support
We also considered the overall customer experience, based on our experiences contacting customer service. We had positive experiences with Wells Fargo. Its courteous and knowledgeable representatives were willing to take the time to explain practices and loan features to us. We also had a very good experience with U.S. Bank's customer service. We found Prospect Mortgage to have a quick turnaround time with its emails, which provided clear and direct answers to our questions.
Our Verdict & Recommendations
When choosing a mortgage loan lender, there are many aspects to consider, but what it costs you, either now or later, should be the biggest consideration. With interest rates, fractions of percentages add up, so shopping around for the lowest rates is the best idea, because rates are always changing. However, choosing a broker, such as LendingTree, is great choice. It finds the best rates from lenders so you have options. Actual lenders can provide comparable rates as well, including Quicken Loans.
Qualifying for a loan depends on the loan amount, the loan type and your personal history. While there are industry preferences concerning eligibility, some companies are willing to bend the requirements if other figures balance out. If you have less-than-great credit, some companies, like Prospect Mortgage, might work with you. If you do not have enough money saved for a large down payment, you may qualify for an FHA loan (which all of the companies on our lineup offer).
The overall experience with the company matters too, especially considering you will be working with them for potentially three decades. Our best experiences were with Wells Fargo and U.S. Bank.
When choosing a mortgage company, shop around. We have provided the best mortgage companies and refinance companies on our lineup, which is a good place to start. Look for the lowest rates available and go from there. If you are concerned you may not qualify, find companies with less-strict eligibility requirements. And in the end, make sure you agree to work with a company that will work with you.
Our hands-on testing is designed to simulate typical, real-world experiences with the service. For our tests on mortgage and refinance loans, we contacted each company via phone and email as a potential borrower. The companies had no input on our testing methodology, and our rankings were not shared with them prior to publication.