5 critical action steps every first-time homebuyer must know
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By Leslie Cook
January 14, 2021
Money; Getty Images

This week, the average rate for a 30-year fixed-rate mortgage increase by 0.14 percentage points to 2.79% with 0.7 discount points paid, according to Freddie Mac’s benchmark Primary Mortgage Survey.

“As Treasury yields have risen, it is putting pressure on mortgage rates to move up,” said Sam Khater, chief economist for Freddie Mac. “While mortgage rates are expected to increase modestly in 2021, they will remain inarguably low, supporting homebuyer demand and leading to continued refinance activity.”

Typically, mortgage rates move in lockstep with Treasury yields. So when the yield on the 10-year Treasury note crossed above 1% for the first time in 10 months last week, experts assumed rates will soon rise.

“Borrowers are smart to take advantage of these low rates now and will certainly benefit as a result,” noted Khater. Last week, before the jump, there was an increase in both purchase and refinance activity, indicating that the housing market remains very active.

The average rate for a 15-year fixed-rate mortgage increased .07 percentage points to 2.23% with 0.9 points paid. A year ago the rate averaged 3.07%. The rate on a 5-year adjustable-rate mortgage jumped 0.37 percentage points to 3.12% with 0.4 points paid. A year ago the ARM rate was 3.39%.

Mortgage Rate Trends

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Mortgage Rates in 2021

Interest rates have been trending higher during the past week thanks to a number of factors. The certification of Joe Biden as the new president has brought an expectation of greater stimulus for an economy still reeling under the effects of the COVID-19 pandemic. In turn, Treasury yields have been trending higher, pushing interest rates up.

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2021 Mortgage Rate Outlook

On Thursday, the yield on the 10-year Treasury note was at 1.092%, up from Wednesday’s close of 1.088%. Treasury yields had been trending downward after reaching a high of 1.138% on Tuesday. The 10-year Treasury is a key benchmark for mortgage rates.

Normally, there is a spread of about 1.8 percentage points between the 10-year Treasury and average mortgage rates.

Yields crossed the 1% mark last week for the first time since March. Before then, the note’s yield had never dipped below 1%, even during the Great Recession. Treasury yields have held at low levels since the Federal Reserve indicated that it expects to keep the short-term Federal Funds rate at its current range of 0% to 0.25% through 2022 or longer.

At its meeting ending December 16, the Fed stuck to its commitment to continue purchasing mortgage-backed securities and treasuries to help control market volatility and maintain liquidity.

More People Applied for Mortgages

The overall number of mortgage applications jumped up by more than 16% for the week ending on January 8, according to the Mortgage Bankers Association. Home purchase applications were up a seasonally adjusted 8% from the previous week. Overall, purchase applications were 10% higher than the same week a year ago.

Refinance Applications Were Also Up

Refinance applications increased by 20% week-over-week, and 93% higher than the same week a year ago. Refinance loans made up nearly 75% of all mortgage application activity last week, as the index hit its highest level since March.

Why Your Personal Mortgage Rate May Be Different From Current Mortgage Rates

Not all shoppers can expect to get the very best mortgage and refinance rates. Credit scores, loan term, interest rate types (fixed or adjustable), down payment percentage, home location, and the loan’s size will affect mortgage rates offered to individual home shoppers.

Rates also vary between mortgage lenders. It’s estimated that about half of all buyers only look at one lender, primarily because they tend to trust referrals from their realtors. Yet this means that they may miss out on a lower rate elsewhere.

Last year, Freddie Mac reported that buyers who got offers from five different lenders averaged 0.17 percentage points lower on their interest rate than those who didn’t get multiple quotes. If you want to find the best rate and term for your loan, it makes sense to shop around first.

Today’s Mortgage Rates and Your Monthly Payment

More than other factors, your annual percentage rate on your real estate purchase will affect your monthly payments — whether you’re refinancing or buying a new home.

On a $200,000 home loan with a fixed rate for 30 years:

  • At 3% interest rate = $843 in monthly payments (not including taxes, insurance, or HOA fees)
  • At 4% interest rate = $955 in monthly payments (not including taxes, insurance, or HOA fees)
  • At 6% interest rate = $1,199 in monthly payments (not including taxes, insurance, or HOA fees)
  • At 8% interest rate = $1,468 in monthly payments (not including taxes, insurance, or HOA fees)

Refinancing to a lower interest rate could save hundreds of dollars a month if you kept the same loan terms. Shortening the loan term could negate your monthly savings but save thousands over the life of the loan. You can experiment with a mortgage calculator to find out how much a lower rate could save you.

Other factors besides interest affect how much you’ll pay in mortgage payments:

  • Mortgage Insurance: Mortgage insurance costs up to 1% of your home loan’s value to your payment each year. Borrowers with conventional loans can avoid private mortgage insurance by making a 20% down payment or reaching 20% home equity. FHA borrowers pay a mortgage insurance premium throughout the life of the loan.
  • Closing Costs: Some buyers finance their new home’s closing costs into the loan, which adds to debt and increases monthly payments.
  • Loan Term: Choosing a 15-year mortgage instead of a 30-year mortgage will increase monthly mortgage payments but reduce the amount of interest paid throughout the life of the loan.
  • Fixed vs. ARM: An adjustable-rate mortgage’s monthly payment could change from year to year after the loan’s introductory period expires. A fixed-rate loan’s payments remain the same throughout the life of the loan.
  • Taxes, HOA Fees, Insurance: A monthly mortgage payment could also include homeowners insurance premiums, city or county property taxes, and Homeowners Association fees. Check with your real estate agent to find out how much they would add to your payments.

Will Today’s Mortgage Rates Save You Money on a Refinance?

You should consider refinancing your home loan if your current mortgage rate exceeds today’s mortgage rates by more than one percentage point. Mortgage refinance fees and closing costs would cut into your savings. You also have to consider whether your credit score would qualify you for today’s best refinance rates.

Many online lenders can give you free rate quotes to help you decide whether the money you’d save in interest charges justifies the cost of a new loan. Try to get a quote with a soft credit check which won’t hurt your credit score.

You could enhance interest savings by going with a shorter loan term such as a 15-year mortgage. Your payments may be higher, but you could save thousands in interest charges over time, and you’d pay off your house sooner.

Should You Buy Discount Points to Lower Mortgage Rates?

Many lenders sell discount points. Buying discount points means you’d pay more up front to lower your mortgage rate which could save you money long-term. A mortgage discount point normally costs 1% of your loan amount and could shave 0.25% off your interest rate.

With a $200,000 mortgage loan, a point would cost $2,000. Buying two points would cost $4,000 which would be due, in cash, when you close the loan. These two discount points would translate into a 0.5% reduction to your interest rate.

Discount points could pay off but only if you keep the home loan long enough. Selling the home or refinancing the mortgage within a couple of years would short circuit the discount point strategy. But if you stayed in the loan indefinitely, you’d reach a break-even point after which the discount points would save you more and more over time.

Often, spending cash on a down payment instead of discount points saves more unless you know for sure you’re keeping the loan for years. If a larger down payment could help you avoid paying PMI premiums, put the money toward your down payment instead of discount points.

How to Find the Best Mortgage Lender

Homebuyers have numerous choices for lenders. Your local bank or credit union probably writes mortgage loans with rates close to the current national average. A loan officer in your local branch could guide you through the process.

Online lenders have expanded their market share over the past decade. You could get pre-approved within minutes. Your loan amount combined with current mortgage rates could define your price range for home prices in your area. Many online lenders also assign a dedicated loan officer to offer continuity as you shop.

Shop around to compare rates and terms, and make sure your lender has the loan option you need. Not all lenders write USDA-backed mortgages or VA loans, for example. If you’re not sure about a lender’s veracity, ask for its NMLS number and search for online reviews.

What Type of Mortgage Loan Do You Need?

First-time homebuyers can walk into a mortgage brokerage office or visit an online lender without knowing what kind of mortgage they need. But it’s always better to have an idea of what you’re shopping for, especially since you can’t control other factors such as home prices and current rates.

Mortgage loan types include:

  • Conventional Borrowing: Shoppers with higher credit scores and higher down payments can get a conventional mortgage with either a fixed or adjustable rate. Mortgage interest rates can be low for qualified buyers.
  • Subsidized Borrowing: The Federal Housing Administration and the U.S. Department of Agriculture help first-time homebuyers and shoppers in low-income areas buy homes by subsidizing their mortgage loans. FHA and USDA loans allow shoppers with lower credit profiles (a FICO score of 580) to still get affordable home financing. Subsidized loan restrictions include borrowing maximums and safe housing inspections. These loans are for single-family homes in most cases.
  • Veterans Affairs Loans: Veterans and active-duty service members can buy homes with no down payment and no PMI through the Department of Veterans Affairs’ lending program. Banks make loans that are guaranteed by the VA. VA loans require a funding fee that could range from 1.4% to 3.64% for first-time homebuyers.
  • Jumbo Loans: Homes in high-value housing markets like San Francisco and New York City may not fit within a conventional or FHA loan. Jumbo loans can help because they exceed the conforming loan limits of Fannie Mae and Freddie Mac.
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