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Lending Tree isn’t a lender, but a marketplace where you can invite lenders to come to you. It’s an opportunity to get the lowest interest rates available from small companies you might never have heard of that are eager to lend you money. For a Free Quote, call 855-635-3341.VIEW DEAL ON Lending Tree
Your home is the most important investment you’ll ever make. When you are refinancing or looking to buy a new home, you always want to find the best mortgage rates. This guide will take you through some of the best mortgage lenders we found, and give you some advice on how to find the best lenders for you, no matter where you are on your home owning journey.
After conducting 80 hours of online research, speaking to financial and real estate experts, filling out forms and asking customer service reps and chatbots a battery of questions, we have come up with our best mortgage lenders of 2019. Our top 10 might not be your top 10, and we’ve organized our selection based on varying criteria. Companies made the list based on their reputation for customer service, average rates and fees, ease of application process and availability of clear information, as well as, the extent to which they’ve mended their ways since the housing crisis.
Use our list as a starting point and then shop around, going to your local lenders, a recommended mortgage broker and the bank where you do your checking. Consider getting the recommendation of a trusted professional, and get personalized quotes – either online or in person – based on where you live, your budget, and your credit score.
Lending Tree isn’t a lender, but a marketplace where you can invite lenders to come to you. It’s an opportunity to get the lowest interest rates available from small companies you might never have heard of that are eager to lend you money. For a Free Quote, call 855-635-3341.
Rocket Mortgage by Quicken Loans
The lender not only is the biggest in the country, ranks highest for customer satisfaction and offers a streamlined online application process, but it also has a number of options for borrowers who need to make lower down payments or want to pay less up front.
The bank offers some of the lowest rates and annual percentage rates among the big lenders, and it offers a discount for its checking customers.
Best for Low Rates and Fees
Lending Tree’s online marketplace brings together offers from various lenders – some well-known banks and some smaller lenders vying for your business on nearly any kind of loan, often with lower rates.
You can also find a lot of information on the website, including estimated rates based on your location, loan amount and credit score. In addition, you can preview each lender’s estimated fees.
Once you fill in the offer form, lenders will begin calling you with offers. As you compare rates and offers, pay close attention to the annual percentage rates; this will give you a more accurate sense of the loan’s actual cost. Customers note the calls from lenders can get a little overwhelming, and the company has said it is working to make it easier to opt out of those calls. Once you choose an offer, the rest of your mortgage application happens with that lender. Lending Tree’s job is done. For a Free Quote, call 855-635-3341.
Best Customer Satisfaction
Rocket Mortgage by Quicken Loans allows you to apply online and can streamline the process by linking bank accounts directly to your application.
Typical fixed-rate mortgage loans for 15- or 30-year terms are available, but Quicken also gives you the option of choosing a term of eight to 30 years. FHA and VA loans (for purchase or refinance) are also available.
Rocket Mortgage doesn’t disclose any rates until you apply for pre-approval, but you can find daily national rates on the Quicken Loans site. Be aware, though, that they assume the purchase of two discount points, making the rates look deceptively low.
Rocket Mortgage by Quicken Loans has a reputation for excellent customer service, topping J.D. Power’s customer satisfaction survey for the past few years. Plus, it services almost every loan it writes. Even if your mortgage is sold, odds are Quicken will still manage the customer service end of things.
U.S. Bank has slightly lower interest rates and APRs than other large banks, and your mortgage application can be completed online. Plus, there are more fixed-rate term options than is typical, with 10-, 15-, 20- and 30-year loans available.
In addition to home-equity loans and lines of credit, U.S. Bank offers a Smart Refinance loan with zero closing costs. While such no-cost loans often have higher interest rates, it’s a good option if you don’t plan to stay in your home too long after refinancing.
U.S. Bank is the fifth-largest bank in the country, with branches in 29 states. It ranked seventh in J.D. Power’s 2017 customer satisfaction survey, and it has a relatively low incidence of complaints compared to many of its competitors.
Best for Millennials
SoFi is relatively new to the mortgage market; it first started offering mortgages in 2016. Its lower rates, slick interface and “member” benefits make it popular lender.
Applications are also less focused on credit scores and more reliant on whether you have a solid income, with the promise of earning more in the future. SoFi offers fixed-rate and adjustable-rate mortgages (up to $3 million), as well as refinance options and programs to use refinancing to pay off student loans. However, loans are only available for owner-occupied residences.
Be aware that the rates on SoFi’s site include the purchase of 0.875 of a mortgage point, so they look slightly lower than they are. Still, even adjusting for the points, SoFi’s rates are often lower than many big banks' advertised rates. The company also offers a 0.125 percent discount to “members’ who already have a SoFi account. There are no physical locations with this lender.
Best for High-Value Purchases
PNC offers typical fixed-rate loans with terms of 10 to 30 years as well as adjustable rate mortgages. And its $5 million upper limit on a jumbo mortgage is higher than most other lenders'.
There are also options for home equity lines of credit and refinancing loans. PNC offers tools to educate consumers about budgeting for a home and the process of applying for a mortgage. For example, its Home Insight Planner helps you estimate what you can realistically afford, based on your income, debt and monthly expenses. And you don’t have to upload personal information to get this estimate.
Preapproval only requires a simple online form, and a loan officer will contact you within a few days. Much of the application process is automated, but you need to speak with someone in person (over the phone or at a branch) to finish the application process.
Why trust us?
We’ve been writing about mortgage lenders for eight years. There are many options, including local banks, credit unions, and online mortgage companies, but we focused on banks and other institutions that serve large audiences and have branches in multiple states.
We chose to include Lending Tree because it’s a trusted mortgage company and a useful way to get multiple offers.
As part of our research, we consulted with experts on mortgage lending to learn more about the application process, what you need to apply and how you can best position yourself to get approved with a good rate.
In case you already have a mortgage, we also looked at each lender’s refinancing options. Every lender we looked at has options for refinancing loans.
Interest rates and home prices are subject to a lot of external factors beyond the control of even these lenders. With that in mind, we try to compare them on factors that remain stable. The factors included application requirements, customer service and any legal actions taken against them.
What are the first steps I need to take when looking for a mortgage?
Whether you’re thinking about buying your first home or just planning to move, your first step should be to check your credit score.
“You want to shine your credit up as best you can,” says John Cooper, CFP, a private client adviser at Greenwood Capital in South Carolina. “If you were selling your automobile on the side of the road, you wouldn’t drive it out there with mud all over it and a window busted out.“
Next, get a good idea of your income, available assets and existing debt to make a budget. Speak to a financial adviser or use one of the affordability calculators available on several lenders’ websites. You’ll need those numbers to begin your search, both for a home and for the loan you’ll need to pay for it.
Then you’ll be ready to start your search by asking friends, visiting your current bank and, of course, checking trusted websites.
What do you need to apply for a mortgage?
When you are ready to apply for a mortgage, you begin by providing documents and other information to your loan officer. Often, you can be approved quickly, but the loan’s actual underwriting can take more than a month, even longer in some cases.
The lender needs documents to verify your identity and your income. Come prepared with a driver’s license, pay stubs and at least two years' worth of W-2 forms. If you work freelance or on a contract basis, you may need to provide additional documents. In addition, if you receive a monetary gift from a relative to go toward the purchase of your home, they may need to provide a letter for the lender. Further, if you or your partner is a student, you may need to provide school transcripts.
Your savings and assets come under scrutiny as well. The lender wants to see how much of a down payment you can afford and that your savings comes primarily from income or investments, not from gifts. This assures the lender you can keep up on payments.
Loan officers also check your credit score and report. Generally, 620 is the minimum acceptable score, though there are lending programs you can use if yours is lower. By looking at your credit report, the lender can see what debts you have and your payment history. Lenders also check whether your debts are 36 percent or less of your monthly income.
Which banks are the best mortgage lenders?
As much as we are here to tell you our top 10 picks, the answer for you will depend on several factors, such as location, budget and whether you like to deal with loan officers in person or are comfortable conducting all your transactions online or by phone.
Big banks such as Wells Fargo and CitiMortgage offer many types of loans and are likely to continue servicing your loan rather than sell it off to another company. They’re an option if you like the convenience of having your checking account and mortgage in the same place. Some banks even offer certain discounts or credit card points for customers who take out mortgages with them.
On the other hand, a small local lender could have more familiarity with real estate in the area, and its loan officers might have more flexibility to cut deals on rates and fees. Online-only lenders like SoFi, meanwhile have low overhead costs, which could translate to better rates and lower fees for you.
The bottom line is, you should get a quote from at least three lenders to see which can provide the best loan for your needs.
Look into online mortgage brokers
It may seem like banks are your only option for finding a mortgage, but in 2018, more non-bank online mortgage lenders are originating mortgages than banks. Non-bank lenders, including Quicken Loans, So-Fi, and LoanDepot, account for almost half the mortgages issued in the U.S. This is in part because many banks are scaling back their mortgage lending, and these lenders are filling that void. There are some risks and benefits associated with getting a loan from a non-bank lender.
One of the main draws of these lenders is you can apply and receive a response quicker than through a bank. Also, these lenders often have laxer credit standards than banks, so you may get approved for a mortgage with lower credit or income than you would from a bank.
If you’re looking for an FHA loan, many of these alternative lenders may be your best option. There’s some risk though. For example, because these lenders aren’t regulated as tightly as banks are, they may not be as diligent when ensuring a borrower’s ability to repay.
Experts are worried about the prevalence of non-bank lenders and what may happen in an economic downturn. Because these loans aren’t funded by customer deposits, rather by credit, economic troubles could lead to some of these institutions collapsing. This is more of a theoretical problem at this point, and federal regulations require lenders to work with borrowers to find affordable solutions to keep them in their homes when possible.
Consider mortgages from credit unions
When looking for a mortgage, consider credit unions as well as banks and other lenders. Credit unions have some advantages over banks, which may make one a better option for you.
The one drawback to using a credit union is you must be a member to borrow. To join, you may need to be a member of a certain organization or have family members who are. Some credit unions allow you to donate to charities to become a member. You can find nearby credit unions through CULookup.
Credit unions’ lending requirements aren’t as strict as banks’. They have similar credit requirements, though you may find a credit union willing to lend to you if you’re subprime. However, credit unions are more lenient with income requirements – you usually don’t have to makes as much to get approved through a credit union as you do through a bank.
Another advantage is credit unions tend to have lower fees and rates than other lenders. This is partly because credit unions are generally non-profits and keep loans in house rather than sell them like banks tend to do. When you borrow through a credit union, you don’t have to pay as many fees, and closing costs tend to be much lower in general.
What credit score do I need to have to get a mortgage?
“The lowest acceptable FICO score for a conventional mortgage today is 620,” says Jim Sahnger, a mortgage planner with C2 Financial Corp. in Jupiter, Fla. “With FHA loans, it may be possible to find lenders or a mortgage broker that can go down to a 550 FICO.”
For jumbo mortgages, which are loans for larger amounts than the limit set by the Office of Federal Housing Enterprise Oversight (currently $453,100 in most of the United States), you may need higher than a 700.
In all cases, a higher score will get you a better interest rate.
What is debt-to-income ratio?
Your DTI is the ratio of your monthly income divided by your monthly debt payments (including the mortgage). Most mortgage lenders state they prefer that borrowers have a DTI of 43 percent or lower, but that’s not always the case.
“Conventional loans can be approved with ratios of up to 49 percent in some cases [for buyers] with good credit and a minimum down payment of 5 percent,” Sahnger says. “FHA and VA loans both allow for higher debt-to-income levels. With FHA loans, it’s possible to go to 56.99 percent, and I have seen VA loans with debt-to-income levels in the 60s. Compensating factors for higher DTI can include higher reserves, higher FICO scores, and down payment amounts that exceed the minimum typically required.”
What is the best interest rate for a mortgage?
It depends on your credit score, your debt-to-income ratio, how much money you will be able to put down and the size of your loan. You can get a lower interest rate by paying upfront for discount points, which cost 1 percent of your total loan amount and reduce the rate by varying percentages (usually around 0.25 percent per point).
You can look at the week’s average mortgage rates on FreddieMac.com before visiting rate comparison portals such as Lending Tree or lenders’ sites and entering more specific info to get a better idea of the best rates available to you.
What is a rate lock?
Mortgage interest rates are constantly fluctuating because they are subject to a variety of economic factors. When you’re approved for a mortgage, the lender gives you the option of locking in the interest rate at the time of your application. This ensures that if rates rise between the approval and final underwriting, you still have the same rate as when you applied for the loan. You may have to pay a fee to lock your rate, though this depends on the lender. Often, you pay a percentage of the loan amount, usually around 0.25%.
Most rate locks last for between 30 and 60 days, which is usually long enough to complete the underwriting process and finalize the sale. The average mortgage takes around 46 days to close, according to Ellie Mae, a company that provides information to the mortgage industry.
If the underwriting takes longer, the lender can extend your rate lock, though in some cases you may have to pay to extend it. Generally, you pay a small percentage, between 0.125% and 0.25%, of the loan amount. So you can expect to pay at least a few hundred dollars to extend your rate lock.
It's possible that the rate might fall below the rate you locked in. Some lenders offer the option to “float down” your locked rate. This is an option you can use once to get a lower rate than the one you locked in. It is most often offered for construction loans and loans with long-term rate locks.
What do I need to get preapproved for a mortgage loan?
While you can get prequalified for a mortgage simply by telling a lender about your income, assets, debt and credit score, to get pre-approved you’ll need to give up a lot more information. The lender will need proof of your income (W-2 statements or the equivalent); bank statements that show your assets; and gift letters, if you’re getting help with the down payment from a family member. The lender will then check your credit.
What is private mortgage insurance?
Some lenders may require you to carry private mortgage insurance (PMI), which protects them from liability if you fail to make payments. Most lenders will require PMI if your down payment is less than 20 percent of your home’s price. In some cases, having PMI may increase your likelihood of getting approved with a smaller down payment, though it won’t counteract a less than stellar credit score.
The best way to avoid paying PMI is to save enough for a 20-percent (or more) down payment. With increasing home prices this may be harder to do. Another option is an FHA loan, which only requires a 3.5 percent down payment. If your credit isn’t that great, an FHA loan may be a better option, but it can take longer and does have more fees.
PMI typically costs between 0.5 and 1% of the cost of your home. So on a home that costs $250,000, you can expect to pay $2,500 a year or around $208 a month. Typically PMI costs are added to your monthly payments, though some lenders may require you to pay some or all of it all up front. You can deduct your PMI premium from your taxes.
Getting your PMI removed from the loan can be tricky. After you’ve paid 20 percent of your home’s value, you can ask to have the PMI removed. Lenders may require you to get an appraisal to prove you’ve paid 20 percent of the value, which can be time consuming and costly. Lenders are required to remove the PMI when you’ve paid more than 22 percent of your home’s value.
Can I be denied a loan after pre-approval?
“If there’s something that comes up after the preapproval that was not disclosed during the initial process, either intentionally or inadvertently, that would be cause for being denied,” says Pat Renn, CFP, of Atlanta-based Renn Wealth Management Group. It’s in your best interest to disclose anything like past bankruptcies, outstanding debt, and any financial litigation during the pre-approval process.
Will pre-approvals hurt my credit score?
When the mortgage lender does what’s called a hard pull of your credit score, which is necessary for preapproval, it does cause your score to dip a few points. The good news is that if you are shopping for a mortgage and more than one lender does an inquiry within a period of about 45 days, the credit reporting agencies recognize that you’re looking for the best rate and will count all of the inquiries as just one.
What are the different types of loans I can get to buy a home?
If you have reasonably good credit (about 620), you can get a conventional conforming mortgage, which is within the limit set by the Office of Federal Housing Enterprise Oversight (currently $453,100 in most of the United States but higher in a few more-expensive markets). These are available with fixed interest rates at terms anywhere from eight to 30 years, or at adjustable interest rates. Most adjustable-rate mortgages (ARMs) have a fixed lower rate for a set number of years, after which the rate becomes adjustable every year.
If you have lower credit and less cash available for a down payment, you may be eligible for the federally backed FHA loans, which generally have higher interest rates. Some banks offer similar mortgages of their own for first-time homebuyers or buyers with low to moderate income.
- Service members and their spouses can apply for VA mortgages, which let veterans and their families buy a home with no money down.
- Low- to moderate-income borrowers looking to buy in certain rural areas may be eligible for USDA loans, which also require no money down.
- Jumbo mortgages are available for those looking to borrow above the conforming limit. They are often the only loan option for certain types of investment properties and for second homes.
Should I get an adjustable- or a fixed-rate mortgage?
“An adjustable-rate mortgage would work well in a declining-interest-rate environment,” Cooper says. “If interest rates were high now, rather than locking it in now [as a fixed rate], you could see it go down.”
That’s not the case in the current market, as interest rates are expected to rise, but an ARM would still be a good choice for those in certain professions, such as a doctor who’s just beginning a practice and has a high probability of a rising income in the future.
What if I can’t make my payments?
Maybe you’ve lost your job or have experienced another financial crisis and now find yourself struggling to stay current on your mortgage payments. There are several options to consider before you have to worry about foreclosure:
If you’re going to miss a payment, the first thing you should do is call your mortgage servicer. You need to explain that you’re experiencing financial hardship and how long you expect it to last as well as provide other details about your financial situation like how much you have in your bank accounts. The servicer will evaluate your situation and consider what options may be available to you. You may need to fill out an application for mortgage assistance.
The servicer may offer you forbearance, which reduces or suspends your payments for a period of time. These programs can last for a few months to a year, though the average is around four months. After your forbearance expires, you continue with your regular payments as well as make partial payments or pay a lump sum to make up for what was missed during the forbearance period. This is an option if you’re experiencing temporary financial hardship – for example, if you are on disability leave at your job.
Your mortgage servicer may also agree to modify your loan by adjusting the rate, extending the term or even adding missed payments to the balance. It may also reduce the amount you owe by forgiving a portion of the debt.
To be eligible for forbearance or loan modification, you need to show you’ve been making a good faith effort to stay current on your payments and that you have an income-based need for one of these programs. Other more drastic options include declaring bankruptcy or selling the home.
What is an FHA loan and who is eligible for one?
An FHA loan is one insured by the Federal Housing Administration. It has lower credit and down payment requirements than a standard mortgage, making it a good option for first-time homebuyers. FHA loans tend to have lower interest rates than other subprime loans and may have lower closing costs.
A standard mortgage requires a credit score of 620 or higher. FHA mortgages are an option worth exploring if you have a score lower than that. You can get an FHA mortgage with only a 3.5% down payments, though a credit score less than 580 requires up to 10%.
All FHA mortgages require private mortgage insurance. With a conventional mortgage, you don’t pay for mortgage insurance if you make a down payment of 20% or more. Mortgage insurance on an FHA loan tends to be less expensive than on a conventional mortgage. You pay an upfront premium of 1.75% of your loan amount, which can either be paid in full or financed into the cost of the loan. The remaining cost is added to your mortgage payment each month and ranges from 0.45% to 1.15%, depending on how large your mortgage is, how much of a down payment you make and the loan’s term.
Another advantage of FHA mortgages is they are far more generous with how gifts can be used for down payments. With a standard mortgage, only 20% of the down payment can come from a gift, whereas with an FHA mortgage, all the down payment can be a gift. The lender looks at your income and debt-to-income ratio before making a lending decision.
How much would I have to put down as a first-time homebuyer?
Some banks, such as Chase and Bank of America, offer special mortgages that require as little as 3 percent down for first-time homebuyers or people with lower incomes looking to buy in certain areas. Some lenders allow for very small down payments for anyone, regardless of whether they’re first-time buyers, as long as they have good credit and are willing to pay slightly higher rates and private mortgage insurance (PMI) costs.
How much are typical closing costs?
Closing costs can add up and become unexpectedly expensive, which may make the already complicated home buying process even more difficult. In general, you can expect to pay between 2 and 5 percent of the loan amount in closing costs. So on a $200,000 mortgage, you might pay anywhere between $4,000 and $10,000 in closing costs. If you buy discount points on your interest rate, you pay more upfront in closing costs.
Appraisals and home inspections are some of the most common closing costs. The lender requires an appraisal, which gives it an idea of how much the home you’re buying is worth. This usually runs between $300 and $400. A home inspection isn’t required, but it's a good idea – it can let you know if any repairs are needed so you can negotiate with the seller about covering the costs or lowering the sale price. Typically, a home inspection ranges from $300 to $500.
Another common closing cost is the origination fee, which is around 1 percent of your loan’s value. So on our $200,000 example, you’d pay about $2,000 in origination fees. You can also expect to pay a mortgage application fee. The price varies from lender to lender but is often around $500. You may have to pay other small fees as well, including interest for the first month and attorney’s fees. If you used a broker to find your loan, you have to pay a commission of 1 to 2 percent of the loan amount.
If you don’t put up 20 percent of the loan amount as a down payment, you have to pay private mortgage insurance (PMI) as well as some upfront fees. There’s a PMI application fee that varies from lender to lender. You may also need to pay some of the insurance upfront, either one year’s worth of payments or a lump sum that covers the life of the loan. You can expect to pay anywhere from 0.5 to 2.25 percent of your loan amount.
Are no-closing-cost mortgages a good idea?
When you buy a home, closing costs can add up – typically, they are between 2 and 5 percent of your total mortgage. For example, on a mortgage of $150,000, you can expect to pay between $3,000 and $7,500 in closing costs. According to mortgage data provider ClosingCorp, average closing costs in 2018 were around $3,400. If the upfront closing costs are too much, some lenders may offer you a no-closing-cost option. With a no-closing-cost loan, the lender fronts the closing costs for you and charges you a higher interest rate over the course of your loan.
The advantage of a no-closing-cost mortgage is it can help you get in a home faster. If there’s an issue with getting together enough money for the down payment and closing costs, a no-closing-cost mortgage can fix the problem. With a higher rate, you’ll have higher monthly payments, but you can refinance later. Also, if you stay in the home for shorter than the full term, you may not end up paying back all of the closing costs the lender covered.
If you’re looking at a no-closing-cost mortgage, ask the lender which of the costs it specifically covers. This varies from lender to lender, and though many lenders advertise zero-closing-cost mortgages, you may have to cover some taxes, insurance premiums, and attorney fees. Also check for prepayment or cancellation fees – some lenders require you to own the home for at least three years or pay a penalty. Other lenders may ask you to repay the closing costs if you close early.
What is the best time of year to buy a house?
The housing market fluctuates depending on many factors, but the current interest rate is the biggest one people look at. However, if you’re looking to buy a house, you may not have the luxury of time to wait for rates to drop. With home prices rising 7.7 percent in 2018, timing your purchase right can help save you money.
Finding the right home is a product of supply and demand, though home prices run counter to the common wisdom. Generally, more homes are for sale during the summer months, but that’s when prices also tend to increase. It's in winter that home prices are lower, though you may have fewer options to choose from. Most experts agree that January is the best month to buy a home. This may be due in some part to the fact that those homes have been on the market longer, and the sellers might be more willing to make a deal.
If you’re looking for a home, it may be wise to wait until January. However, so many other factors go into the decision, and season shouldn’t be your sole consideration. Your ability to afford a home and make a substantial down payment should take precedence.
When to refinance?
The main reason to refinance your mortgage is to get a lower interest rate, which can reduce your monthly payments by hundreds of dollars. It can also lower your term and convert an adjustable rate to a fixed rate, and it may be worth considering if your credit score has improved.
Mortgage rates have risen in 2018, and they are expected to rise above 5% by the end of 2019, according to Bankrate. If you currently have a high rate, refinancing can secure a lower rate before they climb any higher.
If your credit score has improved since you got your mortgage, refinancing can help you. According to FICO, improving your score can affect your rate by as much as 1.50%. A score of 760 or above will ensure you get the best rate possible.
Converting from an adjustable rate to a fixed rate is another reason to refinance. Especially since rates are predicted to rise, it’s beneficial to have the stability of a fixed rate. It’s also nice to always know what your monthly payment will be. Refinancing to a fixed rate can be especially good if your adjustable-rate loan has moved past the initial fixed-rate period, which usually has a lower rate.
A mortgage refinance calculator can help you estimate how much your monthly payments will change and help you decide if this is the right time to refinance your mortgage.
Pros & Cons of refinancing your mortgage
Here are some important factors to consider before you apply to refinance your mortgage:
- Lower Rate: This is the main reason people refinance. Lowering your rate can save you considerable money – even going from paying 6% to 4% can cut hundreds off your monthly payment. Before applying, use a mortgage refinance calculator to see how much you could save.
- If you know your credit has improved since you got your mortgage, refinancing may be a good option. With better credit, you’re now likely to find a lower rate than when you first applied.
- Convert to a Fixed Rate: If your current mortgage has an adjustable rate, refinancing to a fixed rate can save you on your monthly payments, especially if you plan to live in your home for a while. Most adjustable-rate loans have an introductory fixed period, but once the loan enters its adjustable phase, your monthly payments can increase dramatically. Even in today’s environment with higher rates, you’re still likely to save some money by refinancing to a fixed rate.
- Bad Timing: If you bought your home at a time when rates were relatively low, refinancing now will result in a higher rate. Mortgage rates have been increasing – the average rate at the end of 2018 was nearly a point higher than it was in 2016. Housing markets fluctuate, and these trends could change. However, if you bought your home when rates were low, refinancing now likely isn’t a good choice.
- You May End Up Paying More: Refinancing isn’t guaranteed to lower your monthly payment or save you money. If you change to a shorter term, you may get a lower rate, but your monthly payment will increase. Refinancing to a longer term will likely reduce your monthly payment, but with interest factored in, over the course of the loan, you may end up paying more.
How much does it cost to refinance a mortgage?
Like all loans, there are some costs associated with refinancing a mortgage. In general, you can expect to pay around 2% to 3% in closing costs. These include things like origination fees, application fees, inspections, and appraisals. Very rarely will you need a down payment to refinance a mortgage. According to ValuePenguin, the average cost to refinance a mortgage is around $4,300.
When refinancing a mortgage, consider how long it will take you to recoup the closing costs. It may not be cost-effective to refinance if you plan to sell your house soon because the closing costs will offset what you might save with a lower rate. Many lenders allow you to finance the closing costs, but if you do that, you lose some equity and have to pay interest on them. If you can, just pay the closing costs in cash.
Keep long-term costs in mind when you refinance. Depending on how you refinance, you may have a lower rate but will end up extending the term, meaning you pay more in the long run. Whether that’s worth it depends on if you value having smaller monthly payments with a longer loan or a shorter loan with higher monthly payments.
Lenders often offer no-cost refinancing. With these types of refis, most or all of the closing costs are waived. Watch out, though – more often than not, the lender will either charge a higher rate or add them to the loan total. If you want to refinance but don’t have the cash for the costs, it still might be worth it, but keep in mind that you’ll pay back what you save in fees over the long term.
Can I refinance my mortgage with bad credit?
One reason to refinance a mortgage is to get a lower rate. Lower rates go along with high credit scores, so refinancing with bad credit may not give you the result you want. Still, most lenders have lower requirements for mortgages than other types of loans, with many giving loans to people with scores around 620. Some will even lend if your score is below that.
With interest rates rising, refinancing to change your rate may not be in your best interest. However, there are some cases where it may be beneficial to refinance, including to get a new term or to convert from an adjustable rate to a fixed rate.
If your credit score is your main concern, you can work to improve it. Get a free credit report and examine it for any inconsistencies. You can petition the credit bureaus to remove any of these errors. You can also improve your credit by paying back debt, avoiding late payments and limiting the amount you put on your credit cards.
Another option if you have low credit is to find a co-signer. This increases your likelihood of approval but opens your co-signer to significant risk, especially if you miss payments. The co-signer doesn’t gain any ownership of your property or use of the loan.
There are also government programs you can look into. If you have an FHA mortgage, you can make use of the FHA Streamline refinance, which requires minimal credit documentation. If you got your mortgage before 2009 and meet other requirements, you may be eligible for a HARP refinance.
What are mortgage points, and should you pay for them?
Mortgage points, sometimes called discount points or discount fees, allow you to pay an upfront fee to reduce your interest rate. That means you pay more upfront, but you have lower monthly payments.
Discount points are different than a down payment. The down payment applies to the principle whereas the points apply to the interest. A down payment builds equity in your home. For example, if you buy a home for $200,000 and make the minimum 20-percent down payment to avoid paying for mortgage insurance, you already own 20 percent of the home. Discount points don’t help build equity, but the lower monthly payments can help you with your monthly expenses.
To buy a point, you pay 1 percent of the home’s total cost. In our example above, to buy one point you pay $2,000. Many lenders let you pay for partial points, so you could buy half a point for $1,000. The rate reduction varies by lender, but 0.25% is considered average. So, if you have an initial interest rate of 5.00% and buy one point, it will drop to 4.75%.
When buying points, use a points calculator to find the break-even point at which you’ll recoup the amount you spent on the points. In our example above, you’ll see a reduction of around $30, so it will take you around 49 months to break even. If you plan on selling before the break-even point, purchasing points is probably not worth the trouble.
You can purchase points on adjustable- and fixed-rate mortgages. With an adjustable rate, the reduction only applies during the initial fixed-rate period, so check to see if the break-even point occurs before that period is over.
What is a cash-out refinance?
With a cash-out refinance, you convert your existing mortgage into a new one with a greater value than your current loan. You take the excess cash and can use it for other large expenses.
If you’ve built up substantial equity and don’t owe a lot on your home, a cash-out refinance may be a good option, especially if you live in an area where home values have been steadily rising. For example, if you only owe $90,000 on a home that’s now worth $200,000, you can add another $50,000 and refinance for $140,000. That extra $50,000 can be used for other expenses, such as home repairs, college tuition or paying down other debts.
A cash-out refinance has closing costs typical of a mortgage. If you borrow more than 80 percent of your home’s value, you may have to pay private mortgage insurance. A cash-out refinance can result in a lower rate and longer term than your current mortgage.
Cash-out refinances are similar in spirit to home equity loans and lines of credit – both tap into the equity you’ve accumulated in your home. The primary difference is a home equity loan is a second loan, and you have to make payments on both the primary mortgage and the home equity loan. A cash-out refinance takes the place of your current mortgage.
New FICO score announced for 2019
FICO announced a new version of its credit score to be launched in 2019. This score, called UltraFICO, differs from standard FICO scores in that it takes banking activity into account – traditional credit scores only look at debt.
The rationale behind UltraFICO is that by looking at checking and savings activity, lenders can make loans to people who have a short credit history or those recovering from a period of financial distress. This score represents one of the greatest shifts in the FICO model since the early ‘90s.
UltraFICO will look at your banking activity, including how frequently you pay bills and if you maintain a positive balance of at least $400 and avoid overdrafting. UltraFICO also looks at how long you’ve maintained a bank account. If you have good savings habit, but a thin credit history, resulting in a score that’s too low for lenders to be comfortable with you may be able to use UltraFICO to get approval. According to Consumer Reports, this applies to over 7 million people.
UltraFICO is geared toward people unlikely to be approved using more traditional credit scores. This can increase the likelihood of being approved for a mortgage, personal loan or credit card, though it's unclear if using UltraFICO will affect the rates of the loan.
FICO plans to roll out this new score in 2019 with a select group of lenders. Details are scarce about who these lenders are, but the Pentagon Federal Credit Union, one of the country’s largest credit unions, has expressed interest in using the new score.
We’ve reached out to FICO to learn more about UltraFICO and will update this when we hear more.
What is a VA loan?
If you’re a veteran or are currently serving in the military, you’re likely eligible for a VA mortgage. This is a loan guaranteed by the Department of Veterans Affairs, which means the requirements are lower than for a conventional home loan.
The main difference between a VA loan and a conventional mortgage is there are no down payment requirements on a VA loan. With a conventional mortgage, you need to put 20% down to avoid paying private mortgage insurance (PMI), and even with an FHA loan, you need to put at least 3.5% down.
Though there’s no PMI, you have to pay a funding fee. This ranges from 1.25% to 3.3% and isn’t charged to veterans with service-connected disabilities. The fee can be paid upfront or rolled into the loan, which increases your monthly payments. Generally, a down payment of 5% or more reduces this fee.
VA loans also have lower credit requirements – you’ll get better rates with a score of 620 than you would for a conventional loan. With a conventional loan, you need a score of at least 740 to get the best rates. Some lenders may approve VA borrowers with a score in the 580 range, though your rates will likely be higher. VA loans are less strict on the amount of debt you can hold and still be approved.
VA loans tend to have lower interest rates than conventional loans. According to Ellie Mae, which tracks interest rates, VA loans averaged rates of 4.73%, while rates for conventional loans were closer to 5%.
What will 2019 look like for mortgages?
If you’re thinking of buying or refinancing a home in 2019, you may want to take some time to gauge how the housing market may play out in the upcoming year. Most experts, including those at Zillow and Fannie Mae, expect interest rates to rise in 2019, with 30-year fixed rates rising above 5% by the end of the year. External economic factors, including potential rate hikes by the Fed, could further affect home interest rates.
One effect of rates increasing is mortgage refinancing will become less likely. According to the Mortgage Bankers Association, the total number of refinances is likely to decrease by around 12 percent. This doesn’t mean refinancing isn’t worth considering, especially if your credit score has improved since you took out your initial mortgage. With a better score, you may be eligible for a rate that’s lower than your current one.
Another factor that will impact mortgages is home prices, which are predicted to rise in general. Lending Tree expects home prices to increase by around 3%, though local real estate markets will vary, and some may even decline. It’s likely that metro areas that had high price growth in 2018 will see some slowdown in the coming year.
According to Realtor.com, 2019 isn’t going to be an especially good year for either buyers or sellers. With high prices and higher rates, first-time buyers may be priced out, though some lenders may loosen their requirements, making it easier to get approved for a loan. Sellers may run into trouble getting the best price, and if your home is above the median price, you may need to drop it or offer other incentives.
Are there tax benefits to owning a home?
Homeownership can provide some benefits come tax time. Here are a few of the most common ways owning a home affects your taxes:
Mortgage Interest Deduction: This is one of the most popular tax deductions for homeowners, and it allows you to deduct any interest you paid on a mortgage in excess of $600. You’ll receive a Form 1098 that tells you how much mortgage interest you paid.
The 2017 Tax Cuts and Jobs Act (TCJA) that affected the country’s tax code didn’t eliminate this deduction, but it lowered the home value eligibility requirement. The new limit is $750,000, down from $1,000,000. If you’re married but filing separately, the limit is $375,000. These new limits only apply to mortgages originated after 2017 – loans from before that year are grandfathered in.
However, the TCJA also doubled the standard deduction, which reduces the likelihood of the mortgage interest deduction being used. To deduct your mortgage interest, you’ll have to itemize your deductions, and with the increase in the standard deduction, that’s less likely.
Any mortgage points you paid for to lower your interest rate can also be deducted. They’re usually included on your Form 1098, but if not, they can be added when you itemize your deductions.
Mortgage Insurance Premiums: If you didn’t put 20 percent down when you bought your home and had to take out mortgage insurance, you can deduct the premium. The premium you paid will be listed on your Form 1098. This deduction is available on mortgages that were originated from 2007 onward. Also, like the mortgage interest deduction, you’ll need to itemize deductions to be able to deduct your mortgage insurance premiums, which is less likely with the increased standard deduction.