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Understanding Why Mortgage Rates Vary by Lender

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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The homebuying process can be exciting, challenging and stressful. One of the biggest aspects is getting a mortgage so you can afford to buy a home in the first place. And of course, you’ll want to secure a mortgage that gives your best terms possible. One of the first things you’ll notice is that mortgage interest rates vary from lender to lender. In fact, they can vary a lot. That’s important when you consider that a difference of 1% can result in thousands of dollars more in interest down the line.

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Given the amount of variability among interest rates, shopping around is essential. Research from Freddie Mac finds that getting just one additional mortgage rate quote saves homebuyers an average of $1,500 over the life of a loan. Getting five quotes saves an average of $3,000.

By understanding why rates differ so much from lender to lender, you can better prepare yourself for the mortgage search process — and set yourself up for success.

Why do rates differ by lender?

There are a number of reasons mortgage rates differ — and change so quickly over time. Larger economic trends are one major factor. Interest rates fluctuate due to factors such as the Federal Reserve policy, the bond market, inflation and economic growth. The housing market itself also has an impact. When fewer homes are being bought and sold, this lowers the demand for mortgages and thus has a downward effect on mortgage rates. Other differences are more specific to the lenders themselves:

Competition. Just like with any other business, competition is usually good for keeping prices down for consumers. So if you live in an area with a lot of lending options, lenders may offer more competitive rates to bring in business.

Risk assessment. Each lender has its own team of underwriters and risk assessment guidelines. Using their guidelines, one lender might find a borrower higher risk than another lender would, and therefore charge a higher rate. For lenders who give loans to “riskier” borrowers (such as online lenders who often give loans to people with lower credit scores), interest rates would also be higher.

Funding costs. It costs money to lend money, so each lender will have its own costs, which could influence the interest rates it offers.

Operating expenses. How much it costs to run each lending institution will vary depending on whether the lender is a large brick and mortar bank, a small community bank or an online lender.

Profit margin. Most lenders are for-profit, so they will want to make money off of each loan, which will determine the interest rate they charge. Credit unions, though, are nonprofit and usually offer lower loan interest rates than banks because they have lower profit margins.

Why is my rate different from the advertised rate?

When you’re shopping around for mortgages, you may find that the rate a particular lender advertises is different than the one you are offered. That’s because the rate you’re quoted takes into account multiple factors unique to your situation.

Credit score. Your credit plays a very big factor in your interest rate. Typically, the higher your credit score, the lower the interest rate you’ll be offered.

You can get an idea of how your credit score and other factors affect the loan rate you can expect by using the Consumer Finance Protection Bureau’s Explore Interest Rates tool. The tool gives you an idea of average interest rates by taking into account your credit score, the state where you’re taking out the loan, the size of your mortgage, your loan terms and the size of your down payment.

Loan terms. The details of your loan also play into the equation. Most lenders advertise rates for “ideal” situations. For example, many assume a fixed-rate loan with a 20% down payment. The size of your down payment is essential, as you’ll typically get a lower interest rate if you make a larger down payment. You may also pay more for a loan that’s either unusually small or large.

The loan’s term, or how long it is, is another variable that may result in a rate different than the one advertised. In general, the shorter the term, the lower your interest rate and overall costs will be, although your monthly payments will be larger.

Whether your loan is fixed or adjustable is another factor. While a fixed rate stays the same over time, an adjustable rate will go up or down based on the market.

The type of loan you’re seeking is another consideration. You’ll likely see different rates for a conventional loan versus an FHA loan,VA loan or USDA loan.

Loan-to-value ratio. Your loan-to-value, or LTV, ratio is another essential calculation that has an impact on your rate offer. Your LTV is the relationship between the amount you’re borrowing and the overall value of the home. The larger your down payment, the lower your LTV will be. You may be quoted a higher interest rate if you have a high LTV.

In general, lenders look for an LTV of 80%. If your LTV is above 80%, you’ll likely have to pay for private mortgage insurance to help protect your lender until you build up at least 20% equity in your home.

APR vs. interest rate

As you’re shopping around for a mortgage, you’ll want to consider the interest rate offered by the various lenders. This shows you the cost of borrowing the money. In addition, you’ll want to review the annual percentage rate, or APR.

The APR gives you a fuller picture of how much the loan will really cost you because it includes not just your interest rate but also costs like broker fees, any points you might be paying to get a lower interest rate and other fees you’ll be charged.

The formula for calculating APR is as follows:

Fees (origination and interest) / principal (including closing costs) / number of days in the loan x 365 x 100

Let’s assume you have a 30-year, fixed rate mortgage of $250,000 with a 4.5% interest rate. If your closing costs equal 2% of the loan ($5,000) and you pay a 1% origination fee ($2,500), using an online calculator, your APR would equal 4.75%.

Do rates vary by state?

Geography plays a role in mortgage rates. Interest rates likely will vary from state to state for several reasons, including

Foreclosure rates and laws. If there’s a high incidence of foreclosure in a certain area, this can increase the costs for a lender, which they then pass on to you in the form of higher interest rates.

The cost of doing business in a given state is also important. If it’s more expensive to operate due to state taxes and wages, these costs may be reflected in the mortgage.

Population. Heavily populated areas with multiple lenders may offer lower rates because they have more competitors for your business. But on the other hand, while lenders in less-populated may have fewer competitors, they also have fewer customers to choose from. That may compel them to offer lower rates, too.

If I lock in my rate, can I renegotiate if rates go down?

As you’re shopping around, potential lenders will likely encourage you to lock down a rate. Because interest rates are constantly fluctuating, a rate lock can help you eliminate the risk that you’ll pay a higher rate than the one offered now.

Once you lock in a rate, the lender will guarantee that rate to you for a set period of time — they typically require that you close within 30 to 60 days. Note that you will usually pay a fee to lock down a rate.

It’s important to know that a rate lock doesn’t guarantee that you’ll still qualify for the same rate when you close. For example, if you face issues with your income verification or credit, or if your home appraisal hits a snag, the rate may be adjusted.

One downside to a rate lock is the possibility of rates going down. If that happens, you’re likely stuck with the original higher rate that you locked in. If you are concerned about that possibility, consider adding a float-down provision to your rate lock. This will allow you to adjust your rate should the rates go down.

Bottom line

There are many factors that influence the mortgage interest rate you’re offered. Some are factors you bring to the table like your credit score and the size of your down payment, while offers are based on the individual lenders. It makes sense to do some comparative shopping and get offers from at least a few lenders to get your best rates.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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How Much Equity is Needed for a Reverse Mortgage?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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While a “reverse mortgage” may sound like an oxymoron, it is a very real niche form of financing reserved for homeowners aged 62 or older. The first Federal Housing Authority (FHA)-insured reverse mortgage through the U.S. Department of Housing and Urban Development (HUD) debuted in 1989 and since then, older people have used reverse mortgages as a way to leverage home equity as an income source. As opposed to a traditional home mortgage in which you borrow money outright, with a reverse mortgage, a homeowner borrows against a home’s equity in exchange for cash. The loan, including accrued interest and fees, is not repaid until the house is sold or the borrower dies, at which point the homeowner’s beneficiaries can opt to repay the loan (and reclaim ownership of the house), sell the home, or do nothing, resulting in foreclosure.

With a reverse mortgage, the borrower’s amount of home equity decreases during the life of the loan while the amount of interest owed increases. There are several types of payment terms to consider for a reverse mortgage, including a single lump sum, monthly payments, a line of credit (allowing the user to withdraw money as needed) or some combination of those options.

The most common reverse mortgages are the FHA-backed loans offered through HUD, known as Home Equity Conversion Mortgages (HECMs). Additional types include single-purpose reverse mortgages — which are not offered everywhere and which limit the funds received to one use — and proprietary reverse mortgages, which are secured by private companies.

How much equity do you need to get a reverse mortgage?

While the amount of equity required may differ by lender and location, a typical minimum equity requirement is 50%. The requirement for a HECM is listed as someone who owns his or her home outright or has paid down a “considerable amount.” However, in essence you need 50% equity because a HECM requires you to use the reverse mortgage money to first pay down any remaining balance on your original mortgage. If you have less than 50% equity in your home, the reverse mortgage financing won’t be enough to cover the gap.

Using a reverse mortgage calculator, here are examples of how much someone would receive from a reverse mortgage in two different scenarios:

Example 1: A 70-year-old woman owns a single-family home valued at $300,000 with no balance left on her mortgage, which means her equity is 100%. It’s estimated she could receive a lump sum as high as $145,902, or 48.6% of her home’s value.

Example 2: A 70-year-old man who lives in a single-family home valued at $250,000 has $65,000 remaining on his mortgage. He would be eligible for a sum as high as $56,085.

The more equity you have in your property and the less you owe on your current mortgage, the more money you’ll get.

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Other requirements for getting a reverse mortgage

The terms of a HECM reverse mortgage are primarily determined by the age of the youngest borrower (generally, the older you are, the more money you may be able to get), the appraised value of the home in question and the creditworthiness of the borrower. And just like with any loan, current interest rates play a role, too.

There are several qualifications borrowers must meet to receive an HECM, including:

  • All potential borrowers (including any partners, if applicable) must be at least 62 years old.
  • The home in question must be the borrower’s primary residence.
  • The borrower can’t be delinquent on any federal debt (such as student loans or HUD-insured loans).
  • The borrower must have the financial ability to pay for additional housing-related expenses like property tax, insurance, maintenance and homeowners association fees.
  • Borrowers must participate in a consumer information session led by a HUD-approved HECM counselor. A list of approved lenders is available through the HUD website. There is typically a fee (around $125) for these sessions.
  • The property must meet FHA standards and be either a single-family home or a two- to four-unit home with one unit occupied by the borrower, an HUD-approved condominium project, or a manufactured home that meets FHA requirements.

In October 2017, HUD made three changes to the HECM program. These updates, which grandfathered in existing reverse-mortgage holders, may keep the program viable through stricter regulations, some of which may also save certain borrowers money in fees, but they also reduced the amount a homeowner can borrow. The changes are the following:

  • A flat 2% rate for mortgage insurance premiums (MIP): This move is beneficial for those taking more than 60% of the loan proceeds upfront, who previously would have had to pay an upfront premium of 2.5% of the value of their home in exchange for the lump-sum option. For those seeking smaller (below 60%) loan amounts, this upfront fee is now higher than the previous 0.5% fee.
  • Reduced ongoing borrowing costs: The annual MIP borrowers will pay over the course of their loans has been reduced to 0.5% from 1.25%.
  • Principal limit factor changes: This is the most complex change HUD implemented, but essentially it means that due to a lowered interest-rate floor, borrowers likely will end up paying less in total fees but also will be able to borrow less money overall.

Are there other options?

For seniors who don’t qualify for a reverse mortgage or who don’t think it’s the right choice for their financial future, there are other options that can help keep you financially comfortable.

  • A home equity loan or home equity line of credit (HELOC): Similar to a reverse mortgage, a home equity loan or HELOC allow a homeowner to convert a portion of their home equity into cash, which can be used for house repairs, medical expenses, cash flow in retirement or other expenses. Qualifying for one of these products requires a credit check and results in recurring monthly payments, but you’ll still own your home and only pay interest on the amount you borrow.
  • Cash-out refinance: Depending on your current interest rate and the interest-rate environment, a refinance could reduce the monthly mortgage payment or generate a lump sum in cash. Again, your home remains a beneficial asset for you and your heirs. Unlike a reverse mortgage, however, the monthly payments do not go away.
  • Downsizing: You may opt to sell your home outright in favor of a smaller, less-expensive property and a lump sum of cash from the proceeds.
  • Selling to a loved one: Some senior homeowners opt to strike a deal with their children or other heirs; they sell below the market price but stay in the home for a predetermined period of time.

Conclusion

There are several risks associated with reverse mortgages that potential borrowers should be aware of before beginning the application process.

  • Fees: To take out a reverse mortgage, you’ll typically need to pay closing costs, the 2% MIP and a loan origination fee. These upfront costs can be thousands of dollars, which is a modest dent in any accrued home equity.
  • The impact of interest rates: While a single lump sum typically has a fixed interest rate, other payment options have a variable-rate structure. The higher the interest rate, the quicker the equity will depreciate.
  • Potential loss of home equity: Because a reverse mortgage monetizes the equity you have built in your home, it can deplete this equity and gradually transfer ownership of the property back to the lender. Those with a goal of passing along their home to children or a charity may not want to consider a reverse mortgage.
  • Loss of tax deductions: Interest on reverse mortgages is not tax-deductible.

Reverse mortgages are not the right option for every senior homeowner, but they do make sense in some circumstances. The important factor to mull over before you move forward is how much benefit you will get from exchanging equity in your home for liquid cash.

This article contains links to LendingTree, our parent company.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Understanding Home Equity Loan Term Lengths

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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As a homeowner, each mortgage payment you make helps build equity in your home. Equity is the difference between your home’s current value and the amount you still owe on your mortgage.

Some borrowers decide to tap into their equity to fund a remodeling project, pay medical bills or cover another large expense. One way to do so is through a home equity loan.

In a home equity loan, you’ll get a lump sum amount of money upfront, usually with a fixed interest rate. This sets it apart from a home equity line of credit, or HELOC, in which you have access to a source of funds you can draw on as needed. With a HELOC, you only pay interest on what you borrow, and many HELOCs have variable interest rates. In those ways, a HELOC works similarly to a credit card.

In either case, the loan or line of credit is secured by your home. If you can’t pay back the loan, you could lose your house to foreclosure.

Home equity loans, also known as second mortgages, have a fixed interest rate, so you will be responsible for paying the same amount of money each month throughout the loan’s term. In this way, it’s similar to how you pay a fixed-rate mortgage.

The size of the home equity loan depends on the equity you’ve built up in your home. While the terms vary depending on your income, credit score and other factors, you may be able to borrow up to 85% of the equity in your home.

Most home equity loans have terms of five, 10 or 15 years. The longer the term, the lower your monthly payments will be. It’s important that you get a term length that’s long enough that you can afford the monthly payments. Keep in mind, though, that the longer the term, the more interest you’ll pay.

Pros and cons of home equity loans

Why opt for a home equity loan rather than taking out a personal loan, or using a credit card? It often comes down to interest rates. Rates are typically lower with a home equity loan because it’s a form of secured debt. The loan is secured by your home.

The biggest downside is the potential to lose your home if you’re unable to make payments. Because you’re securing the loan with your home’s equity, that puts you at risk of foreclosure.

In addition, you will have to pay closing costs, just as you did with your mortgage. These include fees for an attorney, application, filing and preparation, appraisal, title search and more. Closing costs for home equity loans typically end up costing 2% to 5% of the loan’s total.

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Home equity loan term ranges

Home equity loans have a fixed term, typically five to 15 years. You won’t usually be able to secure a term shorter than five years because a shorter term would make for very large monthly payments.

But just because you settle on a certain term — say, 15 years — doesn’t mean you’re necessarily required to be paying off the loan for all 15 years. If you have the cash flow, you may be able to pay off your home equity loan faster than the full term, which saves you on interest. Just be sure to check whether your loan has a prepayment penalty — a fee some lenders charge if you pay off a loan early.

Home equity loans usually have lower interest rates than personal loans or credit cards, which are unsecured debt. For example, average APRs for home equity loans have recently hovered at 4% to 6%. Rates for personal loans, on the other hand, have averaged between 6% and 36% APR. Credit cards have an average between 16.75% and 23.62% APR. Whenever you’re taking out a loan, it’s important to compare rates across various lenders to be sure you’re getting your best deal. The difference can be thousands of dollars over the years.

You may find that a longer term is better for your budget. If your loan is spread out over a longer time period, you’ll have lower monthly payments, which could free up money for other spending or financial priorities. This can make sense if you’re taking out a significant amount for a project like remodeling your home, for example.

However, the longer the loan, the more you’ll end up paying in interest. This is the balance you want to strike as you consider your term.

Another important thing to know is that if you sell your house, you’ll have to pay back the home equity loan immediately.

Cash-out refinancing

If you’re looking to pay back the loan over a term of longer than 15 years, you might want to consider a cash-out refinance, which may have a loan term as long as 30 years. A cash-out refinance is when you take out a new home loan for more than you owe on your current mortgage. You then get the difference in cash to use mostly at your discretion. After you close on the loan, you will pay off the new mortgage according to the new terms and monthly payment amounts.

To be approved for a cash-out loan, you must have equity built up in your home to qualify. Your lender will also look at your credit score to determine if you’re creditworthy enough to pay back the loan. In addition, they’ll consider your debt-to-income (DTI) ratio, which is your total monthly debt payments divided by your monthly gross income. This shows that you can afford the monthly payments.

Another important factor is the loan-to-value (LTV) ratio. This is the ratio between the value of your home and the value of the loan. You won’t qualify for a loan that exceeds a certain share of the value of your home.

You may find that a cash-out refinance is a better option than a home equity loan because you can have a longer loan term. You’ll benefit from having your payments spread out over a longer time frame, making each payment more manageable. In addition, you may benefit if you can get a lower interest rate on the refinancing than you had on your original mortgage. It wouldn’t make sense to do a cash-out refinance if your interest rate will be a lot higher.

However, it’s important to consider the potential downsides of refinancing. Since you’re taking out a new mortgage, you’ll face closing costs higher than you would with a home equity loan. You’ll also want to know how much equity you’d be left with on your property. If the refinancing leaves you with less than 20% equity, you may have to buy private mortgage insurance, or PMI.

Conclusion

Home equity loans can be a good tool if you’re looking for a lump sum of money to complete a major project or pay off credit card balances. However, it’s important to be sure you’re not tapping into your home’s equity without having a strong financial plan to pay back the loan.

Part of that planning process will include considering the length of the loan. Choosing the right length will ensure you have manageable monthly payments while not paying more than you need to on interest.

If you opt for cash-out refinancing, do your research to make sure it’s the best option for your situation. No matter whether you choose a home equity loan or cash-out refinancing, be sure to shop around to make sure you’re getting your best interest rate.

Using your home’s equity to secure a loan can be a smart financial decision, provided you go about it wisely. Choosing the right loan term for your budget is an important part of this decision. By doing your homework and considering all your options, you can rest assured you’re making savvy decisions for your financial future.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.