When it comes to impulse buys, a house typically isn’t one. It's often considered the biggest purchase a person will make in his or her lifetime, so taking the time to be sure of your choice is a good thing.
Going hand in hand with that home you’re buying is the mortgage you’re buying it with, and in previous years it was easier to make an impulse mortgage decision, winding up with a loan you couldn’t pay off.
Housing markets across the U.S. have returned to their pre-recession levels and are continuing to grow in value. As a result, the mortgage market is lending to a wider spectrum of borrowers than was possible during the recession, when lenders were incapable of taking on much risk.
But despite more options, many borrowers are afraid to go outside what they know to be a simple, sure bet – the 30-year fixed-rate mortgage, which represents upwards of 80 to 90 percent of home loans being issued in recent years, according to online real estate database company Zillow. Brian Colon, a loan officer with Supreme Lending in Delray Beach, Florida, says it’s the first question people ask about when they call to inquire about a mortgage and often the only mortgage option he or she is interested in.
Interest rates this week reached a three-year low at 3.58 percent on a 30-year fixed-rate loan, according to mortgage finance agency Freddie Mac. The low rates common since the recession mean a 30-year fixed-rate mortgage makes sense for a lot of people, Colon clarifies, but it’s worth it to discuss your options with a professional – be it a loan officer, mortgage broker or a financial counselor.
After considering all the mortgage options available to you, take a thorough look at what each product means for you both in the short and long run. Here’s what else you should keep in mind when shopping for a home loan.
It’s easier to understand your options now. In a post-recession world, the mortgage market has been simplified, making it easier for borrowers to understand their options. Colon says mortgages are now, for the most part, broken down into fixed and adjustable rates. Gone are the days of hybrid loans and negative amortization, which could easily end up working against the buyer.
“It’s become somewhat easier to explain the options to folks because the options are just much more limited,” Colon says.
But as you consider options for the type of loan, keep your overall goal of building equity in your future home in mind. Bruce Marks, CEO of the Neighborhood Assistance Corporation of America, a nonprofit homeownership group, stresses that particularly for moderate to low-income households, a 15- or 30-year fixed-rate mortgage allows you to own a home knowing what to expect throughout the term of your loan and avoid the risk a changing interest rate poses.
"What you want to get back to is affordable homeownership," Marks says. "Seeing homeownership as stabilizing your personal situation and your community, not as a risky investment."
With the addition of federal requirements for lenders to provide forms clearly explaining the details of the loan, including the TILA-RESPA Integrated Disclosure rule that went into effect in Octobter 2015, borrowers are guaranteed to get a clear-cut explanation of their loan. "Overall it's very beneficial for the consumer," Marks says.
By looking at your credit history and savings, you can also weigh the pros and cons of the types of loans you have access to, whether it’s a conventional mortgage or one insured by an organization like the Federal Housing Administration.
An FHA loan allows for a lower down payment but has a higher interest rate, where a conventional loan offers a lower interest rate but requires a higher credit score – often 740 or higher, says Dennis Johnson, a certified credit counselor for national nonprofit organization ClearPoint Credit Counseling Solutions in St. Louis. The U.S. Department of Veterans Affairs and U.S. Department of Agriculture also insure loans for individuals or properties that qualify under their criteria, offering better options for veterans and individuals looking to purchase in more rural areas.
Lenders are catering to the major borrowing groups going forward. As the makeup of the U.S. population shifts over time, the primary candidates for buying a home change as well – and lenders keep an eye on demographic trends to ensure they are providing quality loans that are needed by the most homebuyers.
A Lenders One Mortgage Cooperative survey of 200 lenders in early 2016 reveals 79 percent of lenders pinpoint millennials, those born between 1982 and 2000 according to the Census Bureau, as a key demographic for homebuying in the coming year. The prediction makes sense, as the millennial generation is reaching an age where homeownership becomes a better investment, particularly as rents are increasing in cities across the country.
To better harness the borrowing power of millennials, lenders are offering mobile and online mortgage options at an increasing rate, says Bryan Binder, CEO of risk management and insurance services firm CastleLine, and leader of Altisource's Origination Solutions business unit, which includes subsidiary company Lenders One. To better attract buyers from key demographics like millennials, lenders are using “more resources to reach that audience, and have products and homes that meet that demand,” Binder says.
Lenda, a refinancing lender for California and Washington, is based solely online and has managed to tap into the millennial generation's ability to easily adapt to online options. "We grew up with the Internet, we trust the Internet with things that our parents wouldn't dare trust the Internet with," says Jason van den Brand, CEO and co-founder of Lenda. He adds that while Lenda will work with any borrower that qualifies to refinance with them, millennials have taken a shining to the ease of the online lending process.
A majority of lenders surveyed by Lenders One also expect to see a larger portion of boomerang buyers – those who have experienced foreclosure, filed for bankruptcy or sold a home in a short sale – back in the homebuying market. According to Binder, the timing is right to see a successful comeback into homeownership for the group.
“Largely it’s the passage of time and people getting more comfortable – originators, certainly – [with the fact] that people do have credit histories. But if they have maintained positive credit trends for the last five or six years, those make good buyers,” Binder says.
Time has also allowed for a relaxation in credit requirements. In the height of the recession, a common assumption was that a homebuyer needed perfect credit to be approved for a loan. Now FHA loans in many cases offer mortgage options to a borrower with an above average, but not excellent, credit score in the 680 range, according to Johnson.
No matter what, be thorough. Many of the lenders who were in the business for the wrong reasons left when the housing crisis hit, but you should still be on the lookout for a loan that isn’t a good deal for you, Johnson says. If a lender representative presses you to decide quickly because a deal will go away, for example, Johnson says it’s a good time to walk away from that option. “When you have high-pressure tactics, that’s usually a sign that that lender might not be working in the client’s best interest,” Johnson says.
Here’s a checklist of things you should weigh when considering each loan:
- Budget. Not just for monthly payments, but for savings to keep for maintenance and general upkeep on your home as well. “If they can’t produce a budget that allows them to save money specifically for that reason, then it might be very difficult for this asset to appreciate in value,” Johnson says.
- Look past the interest rate. In addition to the loan interest rate, take note of the annual percentage rate. The APR indicates the loan interest rate plus any additional fees the lender charges. Johnson notes the APR lets you compare loans at a deeper level.
- Ask questions. The most important thing about signing a loan is knowing that you understand every aspect of it. Especially if you’re looking at the APR or fine print on your loan estimate and you don’t know where a charge comes from, ask about it. “The person might need to ask, ‘What is the fee for? Is there a way to reduce or eliminate this fee?’” Johnson says.
- Trust who you work with. Sharing your financial information should never be taken lightly, so when you’re working with a loan officer be sure it’s someone you feel confident with your personal information, such as your bank statements, tax returns and cancelled rent checks. “The process today is as full-disclosure as it gets,” Colon says, adding that it’s another factor to keep in mind when finding your mortgage online.
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at email@example.com.