Mortgage rates a beginner's guide - dec 6

Mortgage Rates - A
Beginner's Guide

Mortgage Rates – A Beginner’s Guide, Copyright ©, All Rights Reserved.
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US Mortgage Corporation
201 Old Country Road, Suite 140
Melville, NY 117747
Toll Free # 800-562-6715 | www.usmortgage.com
Table of Contents
Chapter 1: What is A Mortgage?....................................................................................... 4
Chapter 2: Types of Mortgages and Mortgage Rates....................................................... 5
Chapter 3: Finding the Best Mortgage Rates ................................................................... 7
Chapter 4: Mortgage Rate Lock-In................................................................................... 9
Things to consider.......................................................................................................... 9
Chapter 5: Effects of Changing Mortgage Rates ........................................................... 11

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Melville, NY 117747

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Melville, NY 117747
Chapter 1: What is A Mortgage?
Although almost all of us have heard of the word, ‘mortgage’, but most of us don’t really
know what it means. Unless you are planning on becoming a home-owner, you will not
know the terms and features of a mortgage. In the simplest terms, a mortgage is a loan
that you take out to buy a property. Unlike other types of loans, a mortgage takes a long
time to pay back and they are secured against property. Most mortgages have time-
periods of around 30 years so the choice of taking out a mortgage should not be taken
lightly. Failure to maintain repayments can result in the repossession of your home. This
is a problem that many Americans faced during the subprime crisis.
The interest rate at which the mortgage loan is taken is known as the mortgage rate.
Mortgage rates are not the same for all borrowers. The rates depend on type of loan, time-
period of the loan, the borrower’s credit history and the current economic situation.
Mortgages are very long-term loans and they are not as simple as other types of loans.
Also, by the end of the mortgage, borrowers end up paying a large amount as interest. To
get the lowest mortgage rate possible and to get the home of your dreams, you need to
research and compare and make sure you know enough about mortgages to take the
plunge. However, thousands of people apply for mortgages every year and beginners
looking to take out a mortgage can get all the information they want from the following
sections.

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Chapter 2: Types of Mortgages and Mortgage Rates
Taking out a mortgage is a life-changing decision as it can affect your financial situation
for the next couple of decades. Mortgage rates are obviously the most important part of
the mortgage as it decides the mortgage repayment installments. You need to take out a
mortgage with an interest rate and monthly installments you can afford to pay. Different
banks, lenders and financial institutions offer many different types of mortgages with
different rates. Moreover, these rates also depend on the credit history of the borrower.
However, all the types and rates of mortgages fall into the categories given below.
 Fixed Rate
This is one of the safest types of mortgages available. In this type of mortgage,
the interest or mortgage rate will remain fixed for the entire term. This means that
your monthly payments will remain the same. This gives a sense of security and
certainty to the borrower. Two common types of fixed-rate mortgages are
available – 30-year fixed mortgage and 15-year fixed mortgage. There are other
terms of mortgages available too.
The 30-year fixed mortgage is the most common type of mortgage that people
take out. As the term of this mortgage is very long, the monthly payments are
very affordable. Also, the interest rate and monthly payments do not change over
the entire period. 15-year fixed rate mortgages are similar except that the
borrower has half the time to repay the loan. This means that the monthly
payments are higher. However, the shorter mortgage period allows people to build
equity much faster.

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Melville, NY 117747
 Adjustable Rate
Adjustable Rate Mortgages (ARMs) are riskier, as in this type of mortgage, the
interest rate varies with time. It can give homeowners a lower mortgage interest
rate but these rates vary with the market and borrowers may end up paying more
that they would with fixed rate mortgages in the long run. These variable rate
mortgages are also more complex and homeowners must comprehend the contract
properly before signing it to avoid nasty surprises. The rates of the ARMs may
change on a yearly basis.
 Combination mortgages
As the name suggests, this type of mortgage loans combine fixed-rate and ARM
features. Homeowners are offered a fixed mortgage rate for a period of the term
of the loan after which the interest rates vary yearly like that of ARMs. The
interest rate of the mortgage can remain the same for three, five or seven years
after which it will be converted to an ARM.
 Split Rate
In this type of mortgage, homeowners are offered a fixed mortgage interest rate
on part of the loan balance and a variable rate on the rest. The balance can be split
in many ways such as 75/25 and 60/40.
 Introductory rates
Such mortgage rates are offered by banks to lure customers and are often known
as honeymoon rates. In this type of mortgage loans, interest rates can be as low as

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2% less than the market average for a period of 6 months to a year. Once this time
period expires, mortgage rates are converted back to original rates matching
market averages.
Chapter 3: Finding the Best Mortgage Rates
As mentioned earlier, shopping around for a mortgage loan is not an easy task and is
time-consuming. Finding affordable mortgage rates is probably the most important task
while looking to take out a mortgage. The interest rates will ultimately decide the amount
of money you need to pay as monthly installments. High interest rates could mean that
you will end up paying a lot more than the value of the property and principal amount in
interest itself. So how do you reduce the interest rates that lenders are offering you?
 Take out an FHA mortgage
Firstly you need to check if you are eligible for a Federal Housing Administration
(FHA) home loan or mortgage. These home loans are mortgages that are fully
insured through the FHA. Consequently, an FHA mortgage has a lot of benefits
over mortgages offered by other financial institutions. The organization offers
some of the best terms. Like lower interest rates, lower down payment and lower
closing rates. It is also easier to qualify for an FHA mortgage and there is less
chance of foreclosure.
 Do your research
There are tons of websites and tools that allow you to compare and analyze the
mortgage rates offered by different lending institutions. As mortgage rates change
almost daily, it is best to monitor these rates over a period and then decide on the
type and rate of mortgage to settle on. Of course, the mortgage rate available to

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Melville, NY 117747
you will depend on your income, assets, FICO credit score and debt to income
ratio.
 Consider Credit Unions
Credit unions often offer rates that are considerably lower than those offered in
the open market. So if you are a part of a credit union, is it best to look for a
mortgage from them.
 Choose short-term loans
15 year mortgage loans are offered at a lower interest rate than 30-year or 25-year
ones. However the monthly payment amount is much higher for short term loans.
If you can afford the monthly payments, then you should go for a short term loan
as you will be paying much less in the long run.
 Improve your credit score
It is common knowledge that a good credit score will ensure that you get the best
interest rates on all kinds of loans. A good credit score can save you thousands of
dollars over the term of your mortgage. You can get the best mortgage rates if
your FICO score is 760 or better. A good score along with a stable income
guarantees that you get the best rates.
 Raise your down payment
Lenders consider the amount of down payment on your home while deciding your
creditworthiness and interest rate. The lowest rates are offered to those who have

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Melville, NY 117747
at least a 20% down payment or in other words a 20% equity cushion. A lower
down payment means that you will also have to pay for Private Mortgage
Insurance or PMI.
Chapter 4: Mortgage Rate Lock-In
Lenders publish mortgage rates on a daily basis; however these rates may not be
applicable to you as interest rates depend on many personal factors. After a lender has
accepted and analyzed your mortgage application, you will be offered an initial approval
and the choice to lock-in the mortgage rate offered to you. Once you lock the mortgage
rate, the lender has to finalize your home loan based on the rate you were offered on the
day you locked-in the rate even though mortgage rates change daily.
Mortgage rates cannot be locked till the lender has verified your credit score and checked
if you have a steady income to make monthly payments. You also need to decide on the
property you wish to buy before you can lock-in your mortgage rate as some properties
like condominiums can only be financed at higher mortgage rates.
Rate locks are not permanent and they are valid for 30 days on average. As it takes more
than 45 days to successfully process a loan, it is best to lock mortgage rates after you find
out when the closing date of the loan is. Most people lock in their mortgage rates when
they are sure that the lock will not expire before the close of the loan.
Things to consider
Some lenders also offer extended locks on rates lasting up to 120 days. To get these
extended locks you have to pay points, which are payments towards the interest amount.
Rate quotes and rate locks are very different terms. A rate quote is a general estimate of

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the rates you could get whereas a rate lock is legally binding and decides the final rate
offered to you.
Most importantly, you must get the rate lock in a written document. A verbal agreement
is useless and a rate lock should be a legally binding document. This document must
accompany the letter of commitment or should be explained in the commitment letter
itself. The lock-in document must include the names of the lender and borrowers, the loan
amount, points, interest rates and the lock-in fees. The date the lock was initiated and the
expiry date of the lock must also be mentioned in the lock-in document. You must read
this document carefully while deciding on a mortgage rate lock in.
Check if your rate lock comes with a rate cop. Rate cops with your rate lock means that if
the interest rate rises, the lender is allowed to raise your mortgage rates slightly while
remaining within the rate cap. Although this is a common practice, it is best to be aware
of this when you lock-in your rates.

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Chapter 5: Effects of Changing Mortgage Rates
Most people ask – why aren’t mortgage rates stable? Mortgage rates are subject to
economic forces and even a slight increase or decrease can make a lot of difference in the
repayments that you make. When there is an economic decline and sales of homes are
decreasing, the rates also decrease. Similarly when economic activity rises, the rates rise
too. Loan percentage points or mortgage rates change almost daily and sometimes more
than once a day.
Homeowners who have taken out fixed rate mortgages are somewhat insulated from the
effects of constant mortgage rate changes. People who have taken ARMs will not feel the
effects of daily mortgage rate changes as lenders are allowed to change mortgage rates
only a fixed number of times a year. Lenders cannot change mortgage rates more than
four or five times a year.
Drastic changes in mortgage rates can have profound effects on homeowners, and sellers
and buyers of real estate. Homeowners are often not prepared for ARM rate changes and
their homes are repossessed when they are unable to afford monthly payments. Even if
the situation is not so dire, many homeowners have to adjust personal finances to meet
rising mortgage rates.
Rising mortgage rates may eat into the purchasing power and life savings of
homeowners. Buying habits of potential real estate buyers and average consumers are
also affected by mortgage rate changes. Most importantly, higher mortgage rates can
make it hard for many homeowners to make payments and late payments can result in
hefty fines and can affect the credit scores of homeowners.

Mortgage rates a beginner's guide - dec 6

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