One reason why the housing bust was so severe was that millions of homeowners got blindsided by the terms of their own mortgage loans. Yet years after the financial crisis, potential buyers still don’t know everything they should about financing a home purchase — even the most basic things.
A recent survey of prospective and current homeowners about their mortgage expertise, and results from the study reveal that many homebuyers don’t know the answers to simple questions about mortgages.
Important facts to know about your mortgage.
Fact 1: APR means “annual percentage rate” and measures mortgage costs.
The cost of mortgage loans is more complicated than you might think, as you can’t just consider the stated mortgage rate. In addition to interest, you also have to take upfront origination fees, closing costs, and any mortgage points you pay into account in order to get a full sense of the total cost of your loan. The APR makes allowances for all those costs, giving you a better gauge against which to make comparisons between different lenders. Often, you’ll find that lenders that offer lower rates actually end up charging a higher APR once you add in the fees.
Fact 2: Mortgage rates change rapidly.
Many homeowners mistakenly believe that mortgage rates are stable. Yet the same way that stocks, bonds, and other financial investments rise and fall throughout the day, mortgage rates are subject to the same market forces. As a result, even a quote you receive earlier on the same day might be out of date if you try to lock in later in the afternoon. That hasn’t been a huge problem lately, with rates near all-time lows, but in more challenging interest rate environments, it’s essential to understand the value of getting a mortgage rate locked in quickly.
Fact 3: Different lenders charge different rates and fees.
Mortgages have gotten a lot of attention from federal regulators lately, with efforts to prevent abuses and standardize procedures for getting mortgage loans. But there aren’t any regulations that require different lenders to offer the same rates on mortgages. On top of that, lenders are free to charge different amounts in fees for related services like appraisals, title insurance, and credit checks. Comparing notes with different lenders will help you make sure you’re paying as little as possible for those fees while getting the best rate you can find.
Fact 4: Refinancing may be possible even if you’re underwater on your mortgage.
During the financial crisis, homeowners who suddenly found themselves owing more money on their mortgages than their homes were worth found it nearly impossible to take advantage of low interest rates to refinance their mortgages. But with federal government assistance through the Home Affordable Refinance Program or the FHA Streamline Refinance program, many homeowners have successfully refinanced their existing mortgages despite being underwater on their loans. Different rules apply depending on whether your loan is backed by Fannie Mae, Freddie Mac, or the Federal Housing Administration. But if you haven’t refinanced lately, it’s still worth looking to see if you qualify.
Fact 5: Low-down-payment loans are still available.
Ideally, putting 20 percent toward a down payment when you get a mortgage loan will give you immediate equity in your new home. But most people struggle to save up even a fraction of that amount. Under certain loan programs offered by federal agencies like the Federal Housing Administration, the Veteran’s Administration, and the Department of Agriculture, you may be able to get financing with little or no money down. FHA loans in particular have become extremely popular recently, with terms that make 3.5 percent down payments possible.