How to find the best mortgage rate as a first-time buyer?

Ask Brian is a weekly column by real estate expert Brian Kline. If you have questions about real estate investing, DIY, buying/selling a home, or other housing questions, please email your questions to [email protected].

Question from Regina in Oklahoma City: Hi Brian, last weekend i visited my sister Jenny. We both want to buy our first home and over a few cold beers we started talking about what we need to do to make it happen. My sister and I are close, but we don’t have any other family we trust to give us advice. Without boring you, I’ll just say that dad has been irrelevant since we were kids, and we love mom, but she’s never been good with money. Long story short, none of us even bought a new car. We are now talking about a house that will probably cost $250,000. After our visit last weekend, Jenny spoke to a girlfriend at work who said we needed to get pre-approved for a mortgage first. Her friend said to call a local real estate agent and ask for the name and number of someone who could help us look for a mortgage. My sister called an agent and was told she had to act fast because interest rates are rising and the longer we wait the more expensive it will be to buy a house. The agent said interest rates will soon be above 5%. Now I think I can ask my question. How could a 5% interest rate be such a big deal? I have a credit card with an interest rate of 14%. An interest rate of 5% seems like a good deal to me.

Answer: Hello Regina. WOW! I’m glad you asked the question because I’m sure many others want to know how to find the best mortgage rate for first-time buyers. But all you need to know is too much to cover in one article. So, I’ll try to help you find a good starting point.

The agent is correct that interest rates are going up and it will be much more expensive to buy a house. You can’t compare a 14% credit card with a 5% mortgage. Fortunately, we haven’t had mortgage rates of 14% since the early 1980s, when inflation was terrible. But any increase in mortgage rates is a big deal when buying a $250,000 home.

The reason there is so much difference between credit card and mortgage interest rates is that credit card lending is much higher risk. If you stop paying your credit card bill, no one will take away the shirt you bought with the credit card. Credit card loans are unsecured loans. The only guarantee that you will refund the money is your signature when you make the purchase. You pay high interest on credit cards because the lender takes on a much greater risk than with a mortgage secured by the house you live in. A mortgage is secured by your home. If you miss too many mortgage payments, the lender will take your home into foreclosure to sell it and get their money back. Less risk for the lender means they can charge lower interest and stay in business.

Regina, now let’s see why a small increase in interest on a mortgage is so much more important. A few months ago, mortgage rates were around 2.8%. On a $250,000 30-year mortgage, the monthly payment would be $1,027 (excluding taxes and insurance). At 5%, the monthly payment would be $1,342. That’s a $315 increase in monthly payment. If you stay in the house for 10 years, the higher interest rate will cost you $37,800 more. That $315 a month is a big deal that can keep many first-time home buyers from qualifying for a mortgage. Compare it to a credit card with a balance of $15,000 that goes from 14% to 16%. The monthly credit card payment goes from about $177 to $201. Most people can afford the extra $24 a month for the credit card much more easily than the $315 increase for the mortgage. This is both the interest rate and the amount of money borrowed.

Now, how does a first time buyer find the best mortgage? This is where things get a lot complicated because there are a lot of variables. The basic process begins by asking questions such as what type of mortgage is right for you? A 30-year fixed rate mortgage is most common for first-time buyers. However, you should be aware of what is available such as Adjustable Rate Mortgages (ARMs) which become more popular when interest rates are higher but are riskier for the homeowner as your monthly payments could increase in the years to come. The starting interest rate is often lower than a fixed rate to make it easier to get a mortgage today. You will want to learn a lot more about ARMs before making this decision.

Another alternative to consider is to pay points to reduce the mortgage interest rate. Discount points are fees that borrowers pay to reduce the interest rate on their mortgages. One point is 1% of the loan amount, which typically lowers the mortgage rate by 0.25%. For example, a point on a $250,000 mortgage would cost you $2,500 to raise the interest rate from 5% to 4.75%. This $2,500 is added to your down payment and does not reimburse the price of the house. It only pays for a lower interest rate so your monthly payment is lower. It can take years for your lower monthly payment to recoup the $2,500 you pay to lower the interest rate. The payback period varies depending on the amount of the loan, the cost of the points and the interest rate. It is often seven to nine years. If you don’t plan to have the loan for that long, it’s a good idea to ignore the discount points.

Regina, I hope this makes sense to you and at least gives you a starting point to ask questions. I think loan types like 30-year fixed loans and ARMs, and discount points are good starting points to start asking questions when interest rates go up. However, many other variables might work better, such as 20 or 15 year fixed rate mortgages. You’ll also want to learn about other options like FHA loans that can require as little as 3.5% down. You also want to know about other costs associated with a mortgage, such as property taxes, homeowners insurance, and HOA fees if your home is part of a homeowners association.

Also, don’t automatically accept the first mortgage pre-approval offered without shopping around.

  • Use online mortgage calculators to estimate different down payments, interest rates, and other mortgage variables such as points.
  • Don’t limit yourself to just one type of lender like national banks. Today’s mortgage market is competitive and includes sources you might not have thought of at first.
  • With a shortlist of lenders, drill down into details and variables. Points are usually expressed as a percentage of the loan. Ask that the points be expressed in dollars. Ask if closing costs can be included in the loan. Read everything carefully to understand what is on offer and what your options are.

Readers will have different ideas of how to find the best mortgage as interest rates rise. Please leave a comment if you have a better idea of ​​what Regina should do.

Our weekly Ask Brian column welcomes questions from readers of all levels of experience with residential real estate. Please email your questions or requests to [email protected].

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