A lot of moving parts help set your monthly mortgage payment, like interest rates, loan terms, downpayments, insurance premiums, escrow, federal subsidies, lender fees, principal, and so on.
And this list doesn’t include the biggest variable of all — the selling price of your property. Understanding how those pieces work (and how they interact with each other) will give you more control over your loan.
Control, of course, is a very good thing, especially when you’re already taking a risk by going into debt for decades on your new house.
The Importance of Loan Shopping
Every mortgage loan is different. Yours should be customized to your home, your budget, and your plans for the property:
- Payments: If you need a lower monthly payment, for example, you’ll do better with a longer-term loan.
- Interest: Someone who wants to pay less mortgage interest should opt for a shorter-term loan and a larger down payment.
- Credit Score: A borrower with a lower credit score or who has trouble making a big down payment should consider federally subsidized loan programs.
- Veterans Loans: A military veteran can access great loan programs through the Department of Veterans Affairs (VA).
- Property: Someone hoping to start a bed and breakfast or buy a fixer-upper may need to stick with conventional loans.
With so many variables to think about, though, many borrowers forget to ask one of the most basic questions: Who should be my mortgage lender?
Instead of asking that question, a lot of borrowers apply for a loan (or for pre-approval) at only one place. Maybe it’s at their neighborhood bank or on a lending website their sister-in-law recommended.
Sometimes this works out OK. After all, current mortgage rates do not vary that widely between different lenders the way savings rates or CD rates can vary among banks.
Still, even a small increase in your mortgage interest rate can be costly when spread across decades. And not all lenders offer the same options for borrowers.
In your neighborhood, I bet you know which grocery store has the best seafood and which one has the best produce. A third store may have the kind of ice cream you like.
When you’re shopping for a mortgage loan, it helps to have a similar inside knowledge about the lenders you’re considering.
First: Know What You’re Shopping For
Until you know the kind of loan you need, it’s too soon to decide about your lender.
So before applying for a mortgage loan, or even for pre-approval, let’s learn more about the components of your mortgage payment:
How Mortgage Rates Work
Except for temporary promotions when you’re financing a refrigerator or some furniture, borrowing money means paying interest.
Your mortgage lender charges interest as a percentage of the amount you borrow paid over the life of your loan. The higher your interest rate and the longer it takes to repay the loan, the more you’ll pay in interest.
Younger adults in their 20s and 30s have lived in a time of historically low-interest rates. We’d consider a 6-percent mortgage interest rate astronomical.
People in their 50s and 60s can remember buying houses at 8 or 10 percent interest and thinking nothing of it.
So why the change, and will things change again?
Since mortgage interest rates are more a function of the broader economy, especially the secondary mortgage market and its investors, we can’t easily predict future mortgage interest rates.
A borrower can, however, access more competitive rates by maintaining a good credit score. It’s not too early to start improving your score, even if you may not buy a house for a few more years.
I like apps such as Credit Karma and Credit Sesame which give you constant access to your credit score and offer suggestions for improving it.
Just a half-point difference in your mortgage interest rate can grow into some noticeable savings as your loan plays out.
Say your dream house costs $275,000. You’re putting $25,000 down and borrowing $250,000:
- At 4 percent interest over 30 years (re-paid on schedule) you’d pay $429,000 to settle the loan.
- At 4.5 percent interest, also 30-years on schedule, you’d pay $456,000 by the end of the loan.
In this case a half-point in interest equals about $27,000! That’s almost $1,000 a year more for the same house. Keeping a good credit score and finding a lower rate by shopping around is worth the time.
What about ARMs? Loan scenarios in this post will describe fixed rate loans. Many banks also offer adjustable rate mortgages, or ARMs.
With these loans, you can get a low initial interest rate for the first few years of the loan. After that, your interest rate changes with the market.
If you’re planning to sell the property quickly, or if you expect to have more financial flexibility in a few years, the low introductory interest rate of an ARM may be attractive. If you’re planning to stay on schedule with your mortgage, a fixed rate loan tends to be more appropriate.
Why the Length of Your Loan Matters
The example above included only 30-year mortgages, which are common especially among first-time home buyers. You can save a lot of interest with a shorter-term loan.
With that same $250,000 mortgage at 4 percent interest, for example:
- You’d pay $429,000 over 30 years.
- You’d pay $364,000 over 20 years.
- You’d pay $333,000 over 15 years.
- You’d pay $304,000 over 10 years.
With such huge savings available from a shorter loan, why would anyone get a 30-year mortgage? Well, to unlock the savings a short-term loan offers, you’d have to pay more each month.
To borrow $250,000 at 4 percent interest, you’d pay about:
- 30-year loan: $1,200 a month.
- 20-year loan: $1,500 a month.
- 15-year loan: $1,850 a month.
- 10-year loan: $2,500 a month.
These payments do not include homeowners insurance or property taxes, but you get the idea: to save more long term, you’ll pay more each month.
So decide what you can afford each month and balance it with how much you could save with a shorter-term loan. Before choosing a lender, make sure it offers the terms you need. Some lenders even offer 40-year loans now.
How Much You Can Put Down
Actions speak louder than words.
Making a down payment on your new house tells your lender (and your realtor and the home’s seller) you’re serious about buying the property.
You’re so serious that you’re willing to put your own cash on the line. Some lenders require a down payment of 3, 5, or 10 percent, for example. Certain federally subsidized loans do not require a down payment at all.
Aside from meeting loan requirements and sending a strong message, there are some really good reasons to make a big down payment:
- Putting down, say, $25,000 means you own $25,000 worth of your house the day you close on it. Starting out on the plus side has some advantages, especially if you need to sell within a few years of closing.
- Putting down 20 percent of the home’s value means you’ll never have to pay Private Mortgage Insurance (PMI). You pay PMI premiums only while you still owe more than 80 percent of the home’s value. PMI protects your lender, not you, if you default.
- A bigger down payment means a smaller loan, and a smaller loan saves money on interest and, of course, principal each month.
If putting together $25,000 or $50,000 for a down payment just isn’t something you’ll ever be able to do, don’t sweat it, and don’t let it prevent you from buying a house.
Instead, save what you can as you prepare for homeownership. You can find some good loans which require only 3 or 3.5 percent down.
With a small down payment, it’ll take longer to pay off your loan and you’ll pay more in interest, but at least you’re investing in your own future and not your landlord’s by continuing to pay rent.
How the Federal Government Can Help
Uncle Sam has a stake in the mortgage industry, and it could help you get the best mortgage to meet your needs.
For example, if you expect saving up a 10-percent down payment would be too high a hurdle for your family, a federally subsidized loan can probably help.
Also, if your credit’s not so great, which has the potential to disqualify you for a conventional loan, a subsidized loan can help.
Let’s take a look at some of the leading federal loan programs:
- Federal Housing Administration (FHA) Loans: You can get financed with just 3.5 percent down with this kind of loan.
- U.S. Department of Agriculture (USDA) Loans: This program has been designed specifically for homeowners in rural areas, and it offers up to 100 percent financing in some cases, meaning you can get a loan with no money down.
- Department of Housing and Urban Development (HUD) Loans: Also offers 100 percent financing to avoid down payments and extends loans to applicants with lower credit scores.
- Department of Veterans Affairs (VA) Loans: For military veterans and their spouses, a VA mortgage lender can make borrowing easier like an FHA or USDA loan. It can also help borrowers after closing by negotiating lower payments. VA loans also do not require borrowers to pay for Private Mortgage Insurance (PMI).
Borrowers should also be aware there are a few limitations with federally subsidized mortgages:
- Some federal loans (not VA) require borrowers to pay Private Mortgage Insurance premiums (or similar annual fees) throughout the life of the loan. Conventional loans allow you to cancel PMI when you’ve paid off at least 20 percent of the loan.
- Federal financing can limit how you use your property. An FHA loan, for example, will finance only an owner-occupied home. If you’re buying a home to rent or for someone else in your family to live in, you may need a conventional loan.
- For safety reasons, federal lenders often balk at older homes that may have lead-based paint or other dangerous living conditions. If you’re buying a fixer-upper or planning to restore the architectural marvel at the end of the block, go with a conventional loan.
Not all lenders have the authorization to sell federally subsidized loans, so check first before starting the pre-approval process with a lender.
Property Taxes and Home Insurance: Add Them In
Owning a home includes some new responsibilities.
If a pipe bursts and floods your basement, it’s your job to repair the damage. If a sinkhole swallows up the backyard, that’s likely on you, too.
Your new responsibilities will also include insuring your property and paying property taxes (in most states). Taxes and insurance can cost thousands of dollars each year, so many new homeowners spread out the expense using an escrow account.
Your mortgage lender should be able to open and manage an escrow account for you.
Each month your mortgage payment will include your interest, your principal, and a payment for your escrow account.
As the months pass, your money in escrow adds up. When your city or county tax bill or your homeowner’s insurance bill comes due, your lender will pay it using your funds in escrow.
You don’t have to use an escrow account. If you’d rather save the money for taxes and insurance in your own savings account, that’s fine. Just be sure to consider these costs when deciding how much money you can spend on a house.
And if you’d like the convenience of an escrow account, check with potential mortgage lenders before applying to make sure they offer this service.
Your realtor or the seller can fill you in on property taxes. Depending on your address, you may need to pay municipal and county taxes, which could be billed separately.
Property taxes help fund police and fire protection, roads and bridges, public schools, EMS, and local parks. They’re an investment in your community.
Closing Costs: Knowing What You’re Paying
Real estate closings can freak out new homeowners, and for good reason. You’re sitting at a conference table signing document after document, committing yourself to a huge amount of debt for a long time.
Then the fees start to pile up, as if a couple hundred thousand dollars in debt wasn’t enough.
Common mortgage-associated fees include:
- A loan origination fee: of 1 percent of the loan amount, charged by your lender.
- An appraisal fee: usually a few hundred dollars, because your lender wants to make sure they’re not financing more than the home’s value.
- Title search fees: also a few hundred dollars, to make sure your new home’s title is clean. You don’t want to learn later that the seller wasn’t actually the owner.
- Flood certification fees: to make sure your home isn’t in a flood zone. If it is, you’ll need flood insurance since your homeowners policy won’t cover flood damage.
- Attorney’s fees: for handling all these details. These can run up to $1,500 or so.
Collectively, we call these expenses — and others depending on your lender and your locale — closing costs. Ideally, you can negotiate with the seller to help pay some of these costs. In some markets, you could ask the seller to pay all the costs.
Most likely, though, you’ll be paying some or all of your closing costs. You may want to add them into your mortgage loan if you don’t have enough cash to pay up front.
Given a choice, I’d avoid financing closing costs, though. Why add to your debt, your interest, and your monthly payments unless you have to?
Payments You Don’t Have to Make
We looked at some loan scenarios above for a $250,000 mortgage. We said you’d pay about $429,000 over 30 years to pay off the debt (not including property taxes, insurance, and fees).
This schedule includes $179,000 in interest charges over 30 years. However, you can pay less by getting ahead of schedule.
By paying extra money each month directly onto your principal, which is the actual money you borrowed to pay for the house (not the interest), you can pay off the loan more quickly, giving your lender less time to collect interest.
Paying an extra $100 a month on principal on our 30-year, $250,000 mortgage example, you could save almost $28,000 in interest charges and pay off the loan about four years early.
Check with your lender before applying for a mortgage to find out how to make extra payments. Some lenders offer obvious ways to make extra payments to principal; others have more elaborate rules and schedules to know about.
And don’t stress! I’ve known a few people who got so focused on paying off their homes, they didn’t contribute money to their 401(k) or IRAs. Pay extra if you can and when you can, but there are worse things than owing money on your house.
7 Best Mortgage Lenders You Should Explore
You know your budget. You know the kind of house you need. You know some neighborhoods you like. You may already have a particular house in mind.
And now you also know the elements of a mortgage and how they can work more in your favor. So it’s time to apply this knowledge and find the best mortgage lender for your specific needs.
The following list of best mortgage lenders contains my opinions, which are based partly on the experiences of clients I’ve worked with. Feel free to leave a comment if your experience with a lender has been different.
Lending Tree
You’ve seen their ads about banks competing with each other to get your mortgage business. Lending Tree has been connecting home buyers with lenders online since 1996, when the Internet was just a baby.
And it’s gotten pretty good at it. Lending Tree does not originate loans, but it can help analyze your application and connect you with some really good lenders.
Along with this valuable service, Lending Tree’s tools for borrowers offer a lot of guidance in one place. You can check current mortgage rates, check your debt-to-income ratio, and get a good sense for how much house you can afford.
Best for: Conventional loans from borrowers who are shopping for the best terms.
Quicken Loans
Quicken Loans also has garnered some pretty good name recognition through advertising. Founded in 1985, Quicken Loans has grown into one of the biggest mortgage lenders in the nation.
The company offers a wide variety of loans of all sizes. They’re authorized for VA mortgage lending and other federal loan programs, jumbo mortgages, and adjustable or fixed rate plans.
Quicken Loans’ website makes it easy to find out what kind of loan fits your needs, even if you’re not quite sure going in.
Best for: Shoppers who need guidance finding a loan program to meet their needs.
Guide to Lenders
Like Lending Tree, Guide to Lenders can connect you with a loan but will not originate a mortgage.
The strength of Guide to Lenders lies in its massive list of connections. You can fill out one, simple application online and let Guide to Lenders can connect your application with a wide variety of leading lenders in minutes.
Best for: Homebuyers who aren’t sure what kind of loan they need but who want to shop for competitive rates.
Rocket Mortgage
Quicken Loans, which I’ve already listed, launched Rocket Mortgage in 2016 to streamline the mortgage-lending process. With Rocket Mortgage you can go through the entire lending process completely online.
Some of the company’s early ads said you could complete the process within eight minutes. I’d set aside at least an hour, though, just to make sure you’re entering your information correctly.
Still, it’s hard to find a more streamlined approach to lending online, especially considering the wide variety of loan programs Rocket Mortgage offers. If you’re refinancing, I’d start here.
Best for: Consumers who are somewhat familiar with mortgages, though the site is intuitive enough for anyone who’s comfortable online.
North American Savings Bank
You won’t see as many ads for North American Savings Bank, but they’ve caught my attention over the years because of their customer service.
The bank allows you to easily apply for pre-qualification, which gives you a great idea how much you can borrow (assuming you enter correct information about your income and expenses).
A pre-qualification helps when you’re home shopping because you already know about how much you can spend.
Then, when it’s time to officially apply, North American Savings Bank has personalized counseling available to help guide you through the process.
Best for: First-time homeowners who need a 15 or 30-year mortgage and some personalized help available.
AmeriValue Mortgage Refinance
Here’s another aggregator, like Guide to Lenders and Lending Tree, except AmeriValue focuses exclusively on refinances.
If you’ve been in your house a while and need to tap into the equity, or if you can now qualify for a lower interest rate than when you first got your mortgage, AmeriValue can help.
I like their simple online application that does not require all of your personal and financial details before it starts matching you with potential lenders. The site doesn’t include many bells and whistles such as mortgage calculators. It assumes you know what you’re after.
Best for: Experienced loan shoppers looking for a good deal on a mortgage refinance.
NBKC Bank
NBKC, formerly known as National Bank of Kansas City, started back in 1999 to serve online customers’ mortgage needs.
The bank specializes in subsidized loans, especially VA loans for veterans and their families, and in customer service.
Applicants can get a personal loan officer like you would at a neighborhood bank or savings and loan. While actual, in-person customer service is available only in Kansas and Missouri, the bank’s phone support makes the process easier for customers in all 50 states.
Best for: First-time buyers who need subsidized loans and in-person guidance.
Your Home, Your Loan, Your Future
Mortgages are common. Banks, credit unions and other lenders originate 6 to 8 million of them a year.
So what makes yours different? That’s a question only you can answer because your loan should match your individual needs.
It’s also a question you should answer.
Yes, your payment must fit your current monthly budget, but you need an eye on the future, too. A mortgage is an investment, after all.
You can make this happen by understanding how to find:
- The right length for your loan: You can save a lot with a shorter-term loan so long as you can make the payments.
- The best interest rate you can qualify for: Start working on your credit score now. Refinance your home if you’ve improved your score a lot since purchasing.
- The best use of your own money for a down payment: Get more house with less debt by spending some of your own money.
- The right amount of help from government subsidies: If you need help with credit or down payments, Uncle Sam can offer it.
- The right balance between paying off your loan early and staying on schedule: The faster you pay off your loan, the more control you’ll have.
When you build a mortgage to match your needs, you’re getting more than just a loan. You’re getting a tool to help build a more stable financial future.
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