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There's no such thing as 'too low' of a mortgage rate, but an extremely low rate could come with fine print

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  • Mortgage rates are at historic lows, and while there are no hidden fees that accompany a low APR, there are a couple trade-offs to keep in mind.
  • You'll probably want a fixed-rate mortgage over an adjustable-rate mortgage so you don't risk your rate increasing later.
  • If your down payment is under 20% of the home value, you'll have to pay private mortgage insurance (PMI), which could add hundreds or thousands of dollars to your annual payments.
  • You probably don't need to rush to buy a home with a low rate, because mortgage APRs will likely stay low throughout 2021.
  • Policygenius can help you compare homeowner's insurance policies to find the right coverage for you, at the right price »

Mortgage rates are at historic lows, so it could be a good time to buy a home. But you may be wondering whether there is a downside to low rates.

In short — nope, there's no catch. A low APR can save you thousands over the life of your loan.

Granted, you'll pay fees when you buy a home, but the current low rates don't come with anymore fine print than usual.

If affordability is your main priority, then there are still two things to keep in mind before you scoop up the lowest rate you can find: the type of loan and private mortgage insurance (PMI).

Fixed-rate loans are better deals than adjustable-rate loans right now

When buying a home, you'll choose between two basic types of loans: a fixed-rate or an adjustable-rate mortgage.

With a fixed-rate mortgage, you commit to the same APR for the entire life of your loan. If you take out a 30-year mortgage, you'll pay the same rate all 30 years, unless you refinance.

Adjustable-rate mortgages (ARMs) lock in your APR for the first few years, then change your rate periodically. For example, a 7/1 ARM secures your rate for the first seven years, then your APR changes every year. 

In the past, ARM rates have started lower than fixed rates for the intro period. The lower rates made ARMs good options for people who expected to move before the intro rate period ended, because they'd never have to face the possibility of a higher rate.

But now fixed rates are comparable to or better than ARM rates. And because rates are at all-time lows in general, getting an ARM is risky. A few years from now, rates will likely be higher than they are now, so an ARM will end up costing you more in the long run.

"I can't see one good reason why someone would choose to go with an ARM versus a 30-year fixed rate in today's market," Darrin English, Senior Community Development Loan Officer at Quontic Bank, told Business Insider. "Why take the risk when you can get a better rate in a 30-year loan?"

You'll probably pay PMI if you make less than a 20% down payment

Low rates might have you thinking about buying a home sooner rather than later — even if it means having less money for a down payment.

Not only will a smaller down payment result in a higher rate, but it could also force you to pay private mortgage insurance (PMI).

Private mortgage insurance is a type of insurance that protects the lender should you fail to make payments. Most lenders require you to get PMI if your down payment is less than 20% of the home value. 

According to insurance-comparison website Policygenius, PMI can cost between 0.2% and 2% of your loan principal per year. If your mortgage is $200,000, you could pay an additional fee between $400 and $4,000 per year until you've paid off 20% of your home value and no longer have to make PMI payments.

Before snatching the lowest rate possible, consider which will be more expensive: a higher rate or PMI.

Fannie Mae's September Housing Forecast predicted rates would stay low well into 2021, so you probably don't need to rush to buy right away. You might have time to save more for a down payment, pay less in PMI, and land a low rate all at the same time.

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