In an effort to cool off the white-hot real estate market in Sweden, the country’s Financial Supervisory Authority (FSA) has been given permission to require homeowners to pay down the principal on their mortgages.
The basic idea here is that the more you have to pay each month on your mortgage, the less you can afford. And if prospective buyers can afford less, home prices must come down. At least, that’s the hope.
Mortgages that feature exotic characteristics such as interest-only periods allow borrowers to purchase more house than they normally would because no principal in due for the first 10 years on a 30-year mortgage.
Instead, the entire payment goes toward interest, which makes the loan more affordable but doesn’t actually require the homeowner to pay down their mortgage.
Unfortunately, this means the only way a homeowner can gain equity is via home price appreciation, which is particularly dangerous if home prices are already inflated and at risk of falling.
That scenario actually played out here in the United States during the recent housing bubble, though it was even worse because of the prevalence of option arms, those that allow negative amortization.
Both interest-only loans and negative amortization loans have been all but banned thanks to the Qualified Mortgage rule that doesn’t allow such features.
Most loans now meet the QM rule meaning only specialized non-QM lenders offer things like IO. I’ve yet to see any banks offering negative amortization again.
70% of Swedes Have Interest-Only Loans
In Sweden, roughly 70% of homeowners have interest-only mortgages, meaning disaster is imminent if the real estate market follows the fateful path ours did just a few years back.
The new rule wouldn’t go into effect until next May, and would exempt mortgages to purchase newly built homes.
Apparently most banks and lenders in Sweden already require borrowers to pay some portion of principal each month, but this rule would make it mandatory.
The Swedish FSA recommends that home buyers pay at least two percent of the principal balance each year until the loan-to-value ratio falls to 70%.
After that, they believe homeowners should pay at least one percent of the principal balance until the LTV drops to 50%.
Here in the United States, interest-only is mainly a thing of the past but 30-year fixed mortgages continue to be the loan of choice for most home buyers, especially first-timers.
If you actually look at an amortization schedule, you’ll see that not much principal is paid early on in the loan term. It’s mainly interest.
For example, a $200,000 30-year fixed set at 4% would only pay down about $3,500 in principal in year one, or less than 1.8% of the total balance.
That fails to meet the recommendation of the Swedish FSA. Also consider that homeowners in the U.S. put very little down, sometimes just 3% or 3.5%, making the loans very risky if property values take a dive again.
I certainly believe homeowners should have a choice as to whether they want to pay down their loans or invest elsewhere, but they absolutely must be qualified to do so.
Consider a 15-year fixed instead. That same $200,000 loan amount set at 3.25% (lower because it’s a 15-year mortgage) would pay off more than five percent of the principal balance in year one.
Of course, many borrowers can’t afford the payments on a 15-year fixed, which is why the 30-year remains so popular. It may also be one of the reasons home prices are so high…
Average mortgage rates tumbled yesterday following a first-class inflation report. In some cases, they are now back below 7% for an excellent borrower wanting a conventional, 30-year, fixed-rate mortgage. Phew!
First thing, markets were signaling that mortgage rates today might fall but perhaps only a little. However, these early mini-trends often switch speed or direction later in the day.
Current mortgage and refinance rates
Program
Mortgage Rate
APR*
Change
Conventional 30-year fixed
7.122%
7.147%
+0.15
Conventional 15-year fixed
6.297%
6.321%
+0.1
Conventional 20-year fixed
7.34%
7.403%
+0.03
Conventional 10-year fixed
6.872%
6.985%
+0.05
30-year fixed FHA
7.065%
7.685%
+0.02
15-year fixed FHA
6.503%
6.972%
+0.16
30-year fixed VA
6.75%
6.959%
+0.25
15-year fixed VA
6.625%
6.965%
Unchanged
5/1 ARM Conventional
6.75%
7.266%
Unchanged
5/1 ARM FHA
6.75%
7.532%
+0.11
5/1 ARM VA
6.75%
7.532%
+0.11
Rates are provided by our partner network, and may not reflect the market. Your rate might be different. Click here for a personalized rate quote. See our rate assumptions See our rate assumptions here.
Should you lock a mortgage rate today?
The chances of mortgage rates falling far and for long later this year improved yesterday. That day’s inflation report helped a lot.
But I reckon we’ll probably need a heap more similarly rate-friendly data in order to bring about that significant and sustained fall. And, while it’s possible such a heap will be delivered quickly, it’s probably more likely we’ll see any improvements late this year or sometime in 2024.
So, my personal rate lock recommendations remain:
LOCK if closing in 7 days
LOCK if closing in 15 days
LOCK if closing in 30 days
LOCK if closing in 45 days
LOCK if closing in 60days
However, with so much uncertainty at the moment, your instincts could easily turn out to be as good as mine — or better. So let your gut and your own tolerance for risk help guide you.
>Related: 7 Tips to get the best refinance rate
Market data affecting today’s mortgage rates
Here’s a snapshot of the state of play this morning at about 9:50 a.m. (ET). The data, compared with roughly the same time yesterday, were:
The yield on 10-year Treasury notes tumbled to 3.81% from 3.91%. (Very good for mortgage rates.) More than any other market, mortgage rates typically tend to follow these particular Treasury bond yields
Major stock indexes were higher. (Bad for mortgage rates.) When investors buy shares, they’re often selling bonds, which pushes those prices down and increases yields and mortgage rates. The opposite may happen when indexes are lower. But this is an imperfect relationship
Oil prices decreased to $75.65 from $75.94 a barrel. (Neutral for mortgage rates*.) Energy prices play a prominent role in creating inflation and also point to future economic activity
Goldprices rose to $1,964 from $1,959 an ounce. (Neutral for mortgage rates*.) It is generally better for rates when gold prices rise and worse when they fall. Gold tends to rise when investors worry about the economy.
CNN Business Fear & Greed index — held steady at 81 out of 100. (Neutral for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are often better than higher ones
*A movement of less than $20 on gold prices or 40 cents on oil ones is a change of 1% or less. So we only count meaningful differences as good or bad for mortgage rates.
Caveats about markets and rates
Before the pandemic and the Federal Reserve’s interventions in the mortgage market, you could look at the above figures and make a pretty good guess about what would happen to mortgage rates that day. But that’s no longer the case. We still make daily calls. And are usually right. But our record for accuracy won’t achieve its former high levels until things settle down.
So, use markets only as a rough guide. Because they have to be exceptionally strong or weak to rely on them. But, with that caveat, mortgage rates today might fall. However, be aware that “intraday swings” (when rates change speed or direction during the day) are a common feature right now.
Important notes on today’s mortgage rates
Here are some things you need to know:
Typically, mortgage rates go up when the economy’s doing well and down when it’s in trouble. But there are exceptions. Read ‘How mortgage rates are determined and why you should care’
Only “top-tier” borrowers (with stellar credit scores, big down payments, and very healthy finances) get the ultralow mortgage rates you’ll see advertised
Lenders vary. Yours may or may not follow the crowd when it comes to daily rate movements — though they all usually follow the broader trend over time
When daily rate changes are small, some lenders will adjust closing costs and leave their rate cards the same
Refinance rates are typically close to those for purchases.
A lot is going on at the moment. And nobody can claim to know with certainty what will happen to mortgage rates in the coming hours, days, weeks or months.
What’s driving mortgage rates today?
Yesterday
Yesterday’s consumer price index (CPI) was a real tonic for mortgage rates. Comerica Bank’s chief economist said that “the fever is breaking“ for inflation.
And The Wall Street Journal (paywall) suggested: “Inflation cooled last month to its slowest pace in more than two years, giving Americans relief from a painful period of rising prices and boosting the chances that the Federal Reserve will stop raising interest rates after an expected increase this month.“
Note that the Journal’s writers (and many others) still expect a rise in general interest rates on Jul. 26. And that might limit how far mortgage rates can fall in the short term.
But other things could also limit the extent and duration of further decreases in mortgage rates. More and more people are talking up the possibility of a “soft landing.“ That refers to the Fed successfully driving down inflation without throwing the country into a recession.
But those of us wanting lower mortgage rates were kind of hoping for a recession. Of course, we didn’t want the bad stuff for the wider population. But mortgage rates tend to fall when the economy is in trouble and rise when it’s doing well.
So, while some falls in mortgage rates might be on the cards later in the year or in 2024, they might not be as big as we’d once been able to hope.
The rest of this week
This morning’s producer price index (PPI) for June was nothing like as important to mortgage rates as yesterday’s CPI. It and tomorrow’s import price index (IPI) are generally seen as secondary inflation measures. But, with markets hyper-sensitive to inflation news right now, they’re worth observing.
Today’s PPI was probably good for mortgage rates. The headline figure (PPI for final demand) came in at 0.1% in June, compared with the expected 0.2%. Just don’t expect it to have as positive an effect as yesterday’s news.
Please read the weekend edition of this daily report for more background on what’s happening to mortgage rates.
Recent trends
According to Freddie Mac’s archives, the weekly all-time low for mortgage rates was set on Jan. 7, 2021, when it stood at 2.65% for conventional, 30-year, fixed-rate mortgages.
Freddie’s Jul. 6 report put that same weekly average at 6.81%, up from the previous week’s 6.71%. But Freddie is almost always out of date by the time it announces its weekly figures.
In November, Freddie stopped including discount points in its forecasts. It has also delayed until later in the day the time at which it publishes its Thursday reports. Andwe now update this section on Fridays.
Expert forecasts for mortgage rates
Looking further ahead, Fannie Mae and the Mortgage Bankers Association (MBA) each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.
And here are their rate forecasts for the current quarter (Q2/23) and the following three quarters (Q3/23, Q4/23 and Q1/24).
The numbers in the table below are for 30-year, fixed-rate mortgages. They were both updated in June.
In the past, we included Freddie Mac’s forecasts. But it seems to have given up on publishing those.
Forecaster
Q2/23
Q3/23
Q4/23
Q1/24
Fannie Mae
6.5%
6.6%
6.3%
6.1%
MBA
6.5%
6.2%
5.8%
5.6%
Of course, given so many unknowables, the whole current crop of forecasts might be even more speculative than usual. And their past record for accuracy hasn’t been wildly impressive.
Find your lowest mortgage rate today
You should comparison shop widely, no matter what sort of mortgage you want. Federal regulator the Consumer Financial Protection Bureau found in May 2023:
“Mortgage borrowers are paying around $100 a month more depending on which lender they choose, for the same type of loan and the same consumer characteristics (such as credit score and down payment).”
In other words, over the lifetime of a 30-year loan, homebuyers who don’t bother to get quotes from multiple lenders risk losing an average of $36,000. What could you do with that sort of money?
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.
How your mortgage interest rate is determined
Mortgage and refinance rates vary a lot depending on each borrower’s unique situation.
Factors that determine your mortgage interest rate include:
Overall strength of the economy — A strong economy usually means higher rates, while a weaker one can push current mortgage rates down to promote borrowing
Lender capacity — When a lender is very busy, it will increase rates to deter new business and give its loan officers some breathing room
Property type (condo, single-family, town house, etc.) — A primary residence, meaning a home you plan to live in full time, will have a lower interest rate. Investment properties, second homes, and vacation homes have higher mortgage rates
Loan-to-value ratio (determined by your down payment) — Your loan-to-value ratio (LTV) compares your loan amount to the value of the home. A lower LTV, meaning a bigger down payment, gets you a lower mortgage rate
Debt-To-Income ratio — This number compares your total monthly debts to your pretax income. The more debt you currently have, the less room you’ll have in your budget for a mortgage payment
Loan term — Loans with a shorter term (like a 15-year mortgage) typically have lower rates than a 30-year loan term
Borrower’s credit score — Typically the higher your credit score is, the lower your mortgage rate, and vice versa
Mortgage discount points — Borrowers have the option to buy discount points or ‘mortgage points’ at closing. These let you pay money upfront to lower your interest rate
Remember, every mortgage lender weighs these factors a little differently.
To find the best rate for your situation, you’ll want to get personalized estimates from a few different lenders.
Are refinance rates the same as mortgage rates?
Rates for a home purchase and mortgage refinance are often similar.
However, some lenders will charge more for a refinance under certain circumstances.
Typically when rates fall, homeowners rush to refinance. They see an opportunity to lock in a lower rate and payment for the rest of their loan.
This creates a tidal wave of new work for mortgage lenders.
Unfortunately, some lenders don’t have the capacity or crew to process a large number of refinance loan applications.
In this case, a lender might raise its rates to deter new business and give loan officers time to process loans currently in the pipeline.
Also, cashing out equity can result in a higher rate when refinancing.
Cash-out refinances pose a greater risk for mortgage lenders, so they’re often priced higher than new home purchases and rate-term refinances.
How to get the lowest mortgage or refinance rate
Since rates can vary, always shop around when buying a house or refinancing a mortgage.
Comparison shopping can potentially save thousands, even tens of thousands of dollars over the life of your loan.
Here are a few tips to keep in mind:
1. Get multiple quotes
Many borrowers make the mistake of accepting the first mortgage or refinance offer they receive.
Some simply go with the bank they use for checking and savings since that can seem easiest.
However, your bank might not offer the best mortgage deal for you. And if you’re refinancing, your financial situation may have changed enough that your current lender is no longer your best bet.
So get multiple quotes from at least three different lenders to find the right one for you.
2. Compare Loan Estimates
When shopping for a mortgage or refinance, lenders will provide a Loan Estimate that breaks down important costs associated with the loan.
You’ll want to read these Loan Estimates carefully and compare costs and fees line-by-line, including:
Interest rate
Annual percentage rate (APR)
Monthly mortgage payment
Loan origination fees
Rate lock fees
Closing costs
Remember, the lowest interest rate isn’t always the best deal.
Annual percentage rate (APR) can help you compare the ‘real’ cost of two loans. It estimates your total yearly cost including interest and fees.
Also pay close attention to your closing costs.
Some lenders may bring their rates down by charging more upfront via discount points. These can add thousands to your out-of-pocket costs.
3. Negotiate your mortgage rate
You can also negotiate your mortgage rate to get a better deal.
Let’s say you get loan estimates from two lenders. Lender A offers the better rate, but you prefer your loan terms from Lender B. Talk to Lender B and see if they can beat the former’s pricing.
You might be surprised to find that a lender is willing to give you a lower interest rate in order to keep your business.
And if they’re not, keep shopping — there’s a good chance someone will.
Fixed-rate mortgage vs. adjustable-rate mortgage: Which is right for you?
Mortgage borrowers can choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM).
Fixed-rate mortgages (FRMs) have interest rates that never change, unless you decide to refinance. This results in predictable monthly payments and stability over the life of your loan.
Adjustable-rate loans have a low interest rate that’s fixed for a set number of years (typically five or seven). After the initial fixed-rate period, the interest rate adjusts every year based on market conditions.
With each rate adjustment, a borrower’s mortgage rate can either increase, decrease, or stay the same. These loans are unpredictable since monthly payments can change each year.
Adjustable-rate mortgages are fitting for borrowers who expect to move before their first rate adjustment, or who can afford a higher future payment.
In most other cases, a fixed-rate mortgage is typically the safer and better choice.
Remember, if rates drop sharply, you are free to refinance and lock in a lower rate and payment later on.
How your credit score affects your mortgage rate
You don’t need a high credit score to qualify for a home purchase or refinance, but your credit score will affect your rate.
This is because credit history determines risk level.
Historically speaking, borrowers with higher credit scores are less likely to default on their mortgages, so they qualify for lower rates.
For the best rate, aim for a credit score of 720 or higher.
Mortgage programs that don’t require a high score include:
Conventional home loans — minimum 620 credit score
FHA loans — minimum 500 credit score (with a 10% down payment) or 580 (with a 3.5% down payment)
VA loans — no minimum credit score, but 620 is common
USDA loans — minimum 640 credit score
Ideally, you want to check your credit report and score at least 6 months before applying for a mortgage. This gives you time to sort out any errors and make sure your score is as high as possible.
If you’re ready to apply now, it’s still worth checking so you have a good idea of what loan programs you might qualify for and how your score will affect your rate.
You can get your credit report from AnnualCreditReport.com and your score from MyFico.com.
How big of a down payment do I need?
Nowadays, mortgage programs don’t require the conventional 20 percent down.
In fact, first-time home buyers put only 6 percent down on average.
Down payment minimums vary depending on the loan program. For example:
Conventional home loans require a down payment between 3% and 5%
FHA loans require 3.5% down
VA and USDA loans allow zero down payment
Jumbo loans typically require at least 5% to 10% down
Keep in mind, a higher down payment reduces your risk as a borrower and helps you negotiate a better mortgage rate.
If you are able to make a 20 percent down payment, you can avoid paying for mortgage insurance.
This is an added cost paid by the borrower, which protects their lender in case of default or foreclosure.
But a big down payment is not required.
For many people, it makes sense to make a smaller down payment in order to buy a house sooner and start building home equity.
Choosing the right type of home loan
No two mortgage loans are alike, so it’s important to know your options and choose the right type of mortgage.
The five main types of mortgages include:
Fixed-rate mortgage (FRM)
Your interest rate remains the same over the life of the loan. This is a good option for borrowers who expect to live in their homes long-term.
The most popular loan option is the 30-year mortgage, but 15- and 20-year terms are also commonly available.
Adjustable-rate mortgage (ARM)
Adjustable-rate loans have a fixed interest rate for the first few years. Then, your mortgage rate resets every year.
Your rate and payment can rise or fall annually depending on how the broader interest rate trends.
ARMs are ideal for borrowers who expect to move prior to their first rate adjustment (usually in 5 or 7 years).
For those who plan to stay in their home long-term, a fixed-rate mortgage is typically recommended.
Jumbo mortgage
A jumbo loan is a mortgage that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac.
In 2023, the conforming loan limit is $726,200 in most areas.
Jumbo loans are perfect for borrowers who need a larger loan to purchase a high-priced property, especially in big cities with high real estate values.
FHA mortgage
A government loan backed by the Federal Housing Administration for low- to moderate-income borrowers. FHA loans feature low credit score and down payment requirements.
VA mortgage
A government loan backed by the Department of Veterans Affairs. To be eligible, you must be active-duty military, a veteran, a Reservist or National Guard service member, or an eligible spouse.
VA loans allow no down payment and have exceptionally low mortgage rates.
USDA mortgage
USDA loans are a government program backed by the U.S. Department of Agriculture. They offer a no-down-payment solution for borrowers who purchase real estate in an eligible rural area. To qualify, your income must be at or below the local median.
Bank statement loan
Borrowers can qualify for a mortgage without tax returns, using their personal or business bank account. This is an option for self-employed or seasonally-employed borrowers.
Portfolio/Non-QM loan
These are mortgages that lenders don’t sell on the secondary mortgage market. This gives lenders the flexibility to set their own guidelines.
Non-QM loans may have lower credit score requirements, or offer low-down-payment options without mortgage insurance.
Choosing the right mortgage lender
The lender or loan program that’s right for one person might not be right for another.
Explore your options and then pick a loan based on your credit score, down payment, and financial goals, as well as local home prices.
Whether you’re getting a mortgage for a home purchase or a refinance, always shop around and compare rates and terms.
Typically, it only takes a few hours to get quotes from multiple lenders — and it could save you thousands in the long run.
Current mortgage rates methodology
We receive current mortgage rates each day from a network of mortgage lenders that offer home purchase and refinance loans. Mortgage rates shown here are based on sample borrower profiles that vary by loan type. See our full loan assumptions here.
The average 30-year fixed-rate mortgage increased slightly to 2.80% for the week ending on July 29, halting a streak of weekly declines, according to mortgage rates data released Thursday by Freddie Mac‘s PMMS.
According to Sam Khater, chief economist at Freddie Mac, while there is some uncertainty about the Covid-19 Delta variant, the housing market is still enjoying record low rates.
“As the economy works to get back to its pre-pandemic self, and the fight against Covid-19 variants unfolds, owners and buyers continue to benefit from some of the lowest mortgage rates of all-time,” said Khater.
The 15-year fixed-rate mortgage decreased two basis points from last week, averaging 2.10% for the week ending on July 29.
Mortgage rates have rarely exceeded 3% this year, despite predictions that 2021 would bring a return to higher levels. Economists and investors are closely monitoring any indication from the Federal Reserve that it may begin tapering of mortgage backed securities and bond purchases.
How fine-tuning MSR valuations can help lenders improve decision-making
As rates change and the market shifts to a more purchase-driven origination environment, lenders need to carefully monitor margins and profitability. If we’ve learned anything in the past year, it’s that operational flexibility and accurate servicing valuation are key to lending profitability.
Presented by: Black Knight
So far, the Federal Reserve has not indicated it will change its accommodative stance until substantial further progress is made in the labor market.
At a press conference following the Federal Open Market Committee meeting this week, Federal Reserve Chairman Jerome Powell said there was some “ground to cover” in the labor market before tapering its $120 billion in monthly asset purchases.
Since March 2020, the Fed’s asset purchases have been split between $80 billion of U.S. Treasury bonds and $40 billion of mortgage backed securities each month, which keeps the cost of long-term borrowing low. A year ago at this time, the 30-year fixed-rate mortgage averaged 2.99%.
Despite the low cost of borrowing, the housing market is showing signs of sluggishness.
Ten-year Treasury yields decreased sharply last week, according to a report from the Mortgage Bankers Association. Investors are increasingly concerned about the rise in Delta variant cases, and what its economic impact will be, according to Joel Kan, MBA’s associate vice president of economic and industry forecasting.
That led to the 30-year fixed mortgage rate declining to its lowest level since February, the trade association reported. 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) decreased to 3.01% from 3.11% for the week ending in July 23.
The 15-year mortgage rate also fell to a record low last seen in 1990, declining 10 basis points to 2.36. Those ultra-low rates naturally resulted in a sharp uptick in refinancing activity.
“With over 95% of refinance applications for fixed rate mortgages, borrowers are looking to secure a lower rate for the life of their loan,” Kan said Wednesday.
But the low rates made little difference in the purchase market, which is still grappling with record home prices. The purchase index decreased to for the second week in a row to its lowest level since May 2020, continuing its third month of year-over-year declines.
The purchase index was down 1% from the week prior, and down 18% compared with last year.
The Federal Housing Finance Agency also reported that May home prices were 18% higher than a year ago. The Mountain Region, which includes Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming saw the sharpest yearly increases. Home prices in those states grew 23.2%, per the FHFA report.
“That continues a seven-month trend of unprecedented home-price growth,” Kan said. “Potential buyers continue to be put off by extremely high home prices and increased competition.”
One of the largest nonbank mortgage lenders in the country is loanDepot, typically landing on the top-10 list overall year after year.
In fact, they’ve even cracked the top five in some years as well, so they’re certainly a big time player in the mortgage world.
At one time, they were even the subject of speculation that they’d be acquired by mega retailer Amazon in its effort to enter the mortgage business.
And in early 2021, they became the Official Mortgage Provider of Major League Baseball (MLB). So expect to see their name and brand around a lot more this year.
Let’s get some history on loanDepot and determine if they’re a good fit for your home loan needs.
Table of Contents
– loanDepot Fast Facts – How to Apply at loanDepot – mello smartloan technology – What Loan Types Do They Offer? – loanDepot Lifetime Guarantee – loanDepot Mortgage Rates – loanDepot Reviews – loanDepot Pros and Cons – loanDepot vs. Rocket Mortgage
loanDepot Launched in 2010
Direct mortgage lender that offers home purchase and refinance loans
Founded in 2010, headquartered in Foothill Ranch, CA
Offers industry’s first end-to-end digital mortgage
Ranked 2nd largest nonbank lender and a top-10 retail mortgage lender
Also the 8th largest VA lender in the country
Over 200 retail branches nationwide and growing
Went public in early 2021 under ticker symbol NYSE:LDI
Despite being a very young company, Foothill Ranch, CA-based direct lender loanDepot has funded more than $300 billion in consumer loans since 2010.
In 2021 alone they funded over $137 billion in home loans, which speaks to their massive growth.
They are led by industry veteran Anthony Hsieh, their CEO and chairman who previously worked at LoansDirect.com, E*TRADE Mortgage, and LendingTree.
The company refers to themselves as the nation’s fifth largest retail mortgage originator, and second largest nonbank consumer lender in the country (Quicken Loans is first).
They employ some 6,400 team members, including 2,000+ licensed loan officers, across 200+ branch locations nationwide.
In 2015, loanDepot began offering personal loans as well, which do not rely on collateral such as real estate.
In recent years, they’ve also launched several joint ventures with home builders and real estate brokerages to expand their purchase loan business.
Their latest is LGI Mortgage Solutions, a partnership with LGI Homes, Inc. that will serve customers in Arizona, Colorado, and Florida.
A prior one is named Farm Bureau Mortgage, a JV with Farm Bureau Bank that will serve homeowners in America’s Heartland.
They also recently launched Henlopen Mortgage, a partnership with Schell Brothers, a premier home builder.
Previously, they created BRP Home Mortgage, a collaboration between loanDepot and Brookfield Residential Properties Inc.
Lastly, loanDepot partnered with iBuyer OfferPad to create OfferPad Home Loans in late 2017.
In November 2020, they announced plans to go public after lots of speculation, and in early 2021 were trading under the NYSE ticker symbol LDI.
At last glance, the mortgage lender had a valuation of about $2 billion.
How to Apply for a Mortgage at loanDepot
You can apply online via a digital mortgage process from their website in minutes
Those who prefer a face-to-face meeting can visit one of their many retail branches
Or you can call them directly and deal with someone over the phone
They also have a wholesale lending division that works with brokers
In terms of applying for a loan, you can visit one of their 150+ branches nationwide, or call a representative at a branch near you. Some folks may still prefer a face-to-face sit down.
Their website features a search by branch or by loan officer if you’re looking for some place or someone specific, similar to the process over at New American Funding.
You can also start the process online at their website by hitting the “apply now” button. It will ask you if you’re currently working with anybody at loanDepot to ensure you are connected to the right person.
They also have a major wholesale division available in 46 states and the District of Columbia, meaning it’s possible to get a mortgage from loanDepot via a mortgage broker as well.
loanDepot Is Big on Technology
Company employs their proprietary mello smartloan technology
Uses data verification to digitally connect income, employment, and asset information
Fully digital experience from application through closing
Can shave 17 days off loan process and get you to clear-to-close in 8 days
In early 2019, loanDepot released its mello smartloan technology, which it bills as “the smarter way to mortgage.”
Instead of having to gather lots of financial paperwork and upload it to the lender’s website, mello allows you to digitally connect income, employment, and asset information.
This makes it both fast and secure— and once connected, their proprietary loan engines will determine the best loan options available, similar to the tech over at Rocket Mortgage.
You can also lean on their “expert loan consultants” if you need assistance in making a choice.
While the digital mortgage and data verification isn’t entirely novel or unique to loanDepot, they say mello smartloan is the “first-of-its-kind end-to-end digital home loan.”
That’s because it’s a fully digital experience from application through closing, not just part of the way.
For example, it comes with mello smartdecision, which instantly determines if you can qualify for an appraisal waiver, just minutes after submitting your online application.
Altogether, they believe mello smartloan can shave up to 17 days off the closing process and get you cleared to close in as little as eight days. That’s pretty fast.
Adjustable-rate mortgages: 3/1, 5/1, 7/1 and 10/1 ARMs
Jumbo loans: Borrow up to $2 million
Government loans: FHA and VA loans
Home equity loans: up to 90% of home value
Like most large mortgage lenders, they offer home refinance loans, home purchase loans, and home equity loans.
That includes both rate and term refinances and cash out refinances, the latter useful if you want to tap equity and get a new interest rate on your mortgage.
They offer both conventional and government loans, including FHA loans and VA loans, but notably absent are USDA home loans.
Additionally, you can get a home equity loan or a renovation loan (FHA 203k loan).
And as noted, they also offer personal loans, which are funded by Cross River Bank, an FDIC-insured New Jersey commercial bank.
With regard to loan type, they offer all the usual stuff like fixed-rate mortgages and ARMs, in common varieties.
loanDepot Lifetime Guarantee
Only pay lender fees the first time you get a mortgage with loanDepot
They waive the fees when you refinance your original home loan
And reimburse the home appraisal fee as well
Must apply directly with loanDepot to qualify
If you get home loan financing from loanDepot once, you won’t have to pay lender fees if you use them again, for life.
With the loanDepot Lifetime Guarantee, they waive lender fees and reimburse your home appraisal fee when you refinance your existing loan with loanDepot in the future.
They say the average homeowner will refinance their mortgage every seven years, which they break down as four times over the span of a 30-year mortgage, and twice over a 15-year mortgage.
The guarantee doesn’t apply to loans obtained to purchase a new property, home equity loans, renovation loans, bond loan programs, down payment assistance programs, or personal loans.
Additionally, the guarantee only works if you submit your application directly to loanDepot (no wholesale or third-party applying such as through LendingTree).
Finally, for guarantees issued on/after January 1st, 2019, you must wait 12 calendar months from the date issued.
loanDepot Mortgage Rates
Unfortunately, loanDepot does not openly advertise their mortgage rates like some other mortgage lenders.
This makes it very difficult to know where they stand price-wise relative to other mortgage companies.
Additionally, they don’t mention any of their lender fees on their website, further complicating the whole shopping around process.
However, mortgage rate quotes are available by phone or online if you fill out an application.
Once you get a quote, you may want to compare it to other mortgage companies. This may be the only way to comparison shop because their rates/fees aren’t openly advertised.
Be sure to consider other banks, nonbanks, credit unions, and independent mortgage brokers.
100% of Loan Servicing Is Now In-House
In late February 2023, loanDepot said it migrated 100% of the mortgage loans serviced by its third-party sub-servicer to its in-house platform.
The move move is part of loanDepot’s Vision 2025 strategy that aims to eliminate mortgage sub-servicing costs and reduce third-party vendor spending.
This allows the company to improve its brand affinity and tap into its existing client base more easily.
For example, they can market products and services (such as a refinance opportunity) to their existing customers more easily.
Perhaps more importantly, it gives them full control of the “entire customer journey” to ensure they can provide a consistent experience from start to finish and beyond.
At last glance, they have loan aervicing centers in Chicago, Illinois and Neward, New Jersey.
loanDepot Reviews
On Zillow, the company has a very impressive 4.88-star rating out of 5 from more than 4,700 customer reviews, which says a lot about their consistency.
Many of the recent reviews indicated that the interest rate was lower than expected, a good sign if you’re looking for a low-cost mortgage.
Over at LendingTree, they have a slightly lower 4.3-star rating out of 5 from about 4,500 reviews, which while not as strong as the Zillow rating, is still considered great.
Additionally, the company is recommended by 86% of those who reviewed them on LendingTree.
loanDepot has a less impressive 3.6-star rating on Trustpilot from over 3,000 customer reviews, some of which you want to read to get a better idea about customer service.
The good news is they have an ‘A+’ rating on the Better Business Bureau website, and are an accredited company. So they should handle any customer complaints professionally.
loanDepot Pros and Cons
The Good
Tons of digital technology to make loan closings fast
Waives lender fees on subsequent refinance transactions
Has retail branches if you prefer to meet in person
Licensed in all 50 states and DC
‘A+’ rating with the Better Business Bureau
Mostly positive customer reviews
The Potential Bad
Don’t let you view mortgage rates without calling them or filling out a form
Don’t offer USDA loans
Doesn’t publish lender fees (unclear if high or low)
High closing costs seem to be a common complaint among reviews
loanDepot vs. Rocket Mortgage
loanDepot
Rocket Mortgage
Digital application
Yes
Yes
Branch locations
Yes
No
Loan types offered
Conventional, FHA, VA, jumbo
Conventional, FHA, VA, jumbo
Minimum FICO score
580
580
Will service your loan?
Yes
Yes
Loyalty program
Yes
Yes
Licensed to do business in…
All 50 states and D.C.
All 50 states and D.C.
BBB rating
A+
A+
Zillow rating
4.88/5 from 4,700 reviews
4.48/5 from 7900 reviews
loanDepot ranks #7th nationally in terms of overall home loan volume, while Rocket Mortgage is #1 in the country.
Last year, loanDepot funded just over $100 billion and Rocket originated a whopping $314 billion.
So while both are very large mortgage companies, Rocket does about triple the business.
However, loanDepot CEO Anthony Hsieh is intent on catching up and taking the top spot eventually.
One distinction between the two is that loanDepot has 200 branch locations, while Rocket simply operates a massive mortgage call center.
This means you can apply in-person with loanDepot, but not with Rocket.
Other than that, they both offer the latest digital mortgage technology, and the same loan programs.
But loanDepot offers a Lifetime Guarantee in which you won’t pay lender fees again if you refinance with them in the future. Rocket doesn’t have a loyalty program.
Lastly, both are accredited with the Better Business Bureau (BBB) and have A+ ratings. loanDepot edges Rocket with a higher Zillow rating though.
Following a one-week downturn, mortgage application volumes inched higher to start July despite surging interest rates, the Mortgage Bankers Association said.
The MBA’s Market Composite Index, which measures weekly application volumes based on surveys of the trade group’s members, rose a seasonally adjusted 0.9% for the seven-day period ending July 7. A week earlier, the index had fallen 4.4%, while compared with the same week in 2022, volume was 30.5% lower. The week’s data included an adjustment for the July 4th holiday.
Application activity rose despite a 22 basis-point leap in the average rates for the conforming (balances under $726,000) 30-year fixed mortgage to 7.07% among MBA lenders. One week earlier, the 30-year FRM averaged at 6.85%. Points increased to 0.74 from 0.65 for 80% loan-to-value ratio loans.
The weekly average rate hit its highest mark since last November, as investors tried to gauge the current health of spending and production and its impact on potential policy moves.
“Incoming economic data continue to send mixed signals about the economy, with the overall impact leaving Treasury yields higher last week, as markets expect that the Federal Reserve will need to hold rates higher for longer to slow inflation. All mortgage rates in our survey followed suit,” said Joel Kan, MBA vice president and deputy chief economist, in a press release.
But inflation numbers released on Wednesday showed further deceleration in June with a 3% annual rise, the smallest increase in over two years. On a monthly basis, consumer prices went up by 0.2%. Both numbers came in lower than consensus estimates, and the data could influence the Fed’s near-term policymaking. Central bank officials are scheduled to announce a decision on whether to hike or hold interest rates on July 26.
With the MBA reporting a reduction in credit availability for larger-sized loans for June earlier this week, the average jumbo rate also shot up to 7.04%, a record high for the series, which dates back to 2011, Kan added. Seven days earlier, the average for jumbo loans above the conforming limit had risen to 6.95%. Borrower points decreased to 0.59 from 0.64
The rise in purchase volume was offset by a drop in refinances last week, according to the survey. The seasonally adjusted Purchase Index climbed higher by 1.8%, but still landed 26.3% under its level from a year ago. Federally backed home buying activity provided an upward push, with a more-than-7% rise in government-guaranteed applications from the previous survey.
But average purchase amounts recorded on applications still clocked in higher despite the increased volume of government loans, which are commonly used for entry-level properties. Mean purchase sizes edged up 0.6% to $426,100 from $423,500. The upward movement comes as other data released last week also showed homes now consistently selling at or above their asking price, a noticeable reversal from late 2022 trends.
Meanwhile, the average refinance size slipped 2.2% to $254,900 from $260,700. The overall average across all new applications came in at $380,200, up 0.4% from $378,800 one week prior.
The Refinance Index, likewise, dropped 4.1% from the previous week and 26.6% on a year-over-year basis as well to come in at its lowest since early June, Kan said. “Demand for rate/term and cash-out refinances remains extremely low with mortgage rates over 7%.”
At the same time, the refinance share of mortgage activity slid down to a 26.8% share relative to all applications, falling from 27.4% a week earlier.
Government-guaranteed loan applications jumped up at a more rapid pace than conventional mortgages, with refinances increasing alongside purchases, leading them to grab a larger share of overall activity. Applications backed by the Federal Housing Administration garnered 13.3% of volume compared to 13% in the previous survey, while Department of Veterans Affairs-guaranteed loans accounted for a 12.6% share, up from 11.7%. The small slice of activity coming from U.S. Department of Agriculture programs remained at 0.4% week over week.
Like other 30-year rates, the contract fixed average for a FHA-sponsored mortgage headed up steeply and finished 18 basis points higher at 6.86% compared to 6.68% one week prior. Points increased to 1.23 from 0.98 for 80% LTV loans.
The 15-year contract rate accelerated 12 basis points to an average of 6.42% from 6.3% seven days earlier. Points for the 15-year mortgage also surged to 1.22 from 0.91.
The 5/1 adjustable-rate mortgage, which starts fixed before becoming variable after 60 months, leaped to 6.24% from 6%. Points increased to 1.42 from 1.23. Adjustable-rate loans, whose popularity tends to rise and fall in tandem with the direction of interest rates, also increased to a 6.6% share of total volume compared to 6.2% one week earlier.
For many people, that monthly mortgage payment can be their biggest recurring bill. It may be the main expense that guides the development and management of their monthly budget, because that is an important bill to pay on time.
Prevailing wisdom says that your mortgage payment shouldn’t be more than 28% of your gross (pre-tax) monthly pay. But whatever that sum actually is, you may be wondering how to shave down the amount. Think about it: A lower mortgage payment could reduce your financial stress. And it can also open up room in your budget to allocate more money towards shrinking other debt, pumping up your emergency fund, and saving for retirement or other goals.
Here, you’ll learn more about your mortgage payment and possible ways to lower it.
What Is a Mortgage Payment?
A mortgage payment is a sum you typically pay every month, but it’s more than just a bill. It reflects an agreement between you and your lender that you have borrowed money to buy or refinance a home, and in exchange, you’ve agreed to pay back the sum with interest over time. If you fail to keep up with your payments, the lender may have the right to take your property.
There are typically four parts of your monthly payment: the loan principal, the loan interest (which is how the lender makes money), taxes, and insurance fees.
A mortgage payment may be a fixed rate, meaning your payment stays the same, month after month, year after year. Or it might be an adjustable rate, meaning the interest and therefore the payment can change at regular intervals.
Pros and Cons of Lowering Your Mortgage Payments
There are upsides and downsides to lowering your mortgage payments.
On the plus side, lowering your mortgage means you likely have more money to apply elsewhere. You might apply the freed-up funds to:
• Pay down other debt
• Build up your emergency fund
• Put more money towards retirement savings
• Use the cash for discretionary spending.
On the other hand, there are downsides to consider too:
• You might wind up paying a lower amount over a longer period of time, meaning your debt lasts longer
• You could pay more in interest over the life of the loan
• If a lower monthly payment means you are not paying your full share of interest due, you could wind up in a negative amortization situation, in which the amount you owe is going up instead of down.
6 Ways to Lower Your Mortgage Payments
Now that you know a bit about how mortgage payments work and the pros and cons of lowering your mortgage payments, consider these ways you could minimize your monthly amount due.
Recommended: How to Pay Off a 30-Year Mortgage in 15 Years
1. Give Your Mortgage a Bonus
If you get a bonus or a windfall, consider throwing some of that money at your mortgage. If you are in a position to make a major lump-sum payment on your home loan, you may benefit from mortgage recasting.
With recasting, your lender will re-amortize the mortgage but retain the interest rate and term. The new, smaller balance equates to lower monthly payments. Worth noting: Many lenders charge a servicing fee and have equity requirements to recast a mortgage.
Other similar options:
• Make a lump-sum payment toward the mortgage principal (say, if you inherit some money or get a large bonus at work)
• Make extra payments on a schedule or whenever you can.
It’s a good idea to tell your lender that you want to put the extra money toward the principal and not the interest. Paying extra toward the principal provides two benefits: It will slowly reduce your monthly payment, and it will pare the total interest paid over the life of the loan.
Refinance your mortgage and save– without the hassle.
2. Reap Rental Income at Home
You could lower how much you pay out-of-pocket for your mortgage by bringing in rental income and putting it towards that monthly bill. You’re not lowering how much you owe, but you are using your home to bring in another income stream.
There are two common methods: “house hacking” (generating income from your property) and adding an accessory dwelling unit (ADU).
• House hacking can mean buying a two- to four-unit multifamily building for little money down and living in one of the units. Multi-family homes with up to four units are considered residential when it comes to financing. Owner-occupants may qualify for and opt for Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, or conventional financing.
Some people house-hack a single-family home, which just translates to having housemates or short-term rental guests.
• An ADU is another option for bringing in rental money to use towards your mortgage. This secondary dwelling unit on the same lot as a primary single-family home could be a detached cottage, a garage or basement conversion (that is, an in-law apartment or similar), or an attached unit.
With any planned addition or renovation to create an ADU, you might want to estimate return on investment — how much you’d charge and how long it would take to recoup the cash you put in before turning a profit.
3. Extend the Term of Your Mortgage
If your goal is to reduce your monthly payment — though not necessarily the overall cost of your mortgage — you may consider extending your mortgage term. For example, if you refinanced a 15-year mortgage into a 30-year mortgage, you would amortize your payments over a longer term, thereby reducing your monthly payment.
This technique could lower your monthly payment but will likely cost you more in interest in the long run.
(That said, just because you have a new 30-year mortgage doesn’t mean you have to take 30 years to pay it off. You’re often allowed to pay off your mortgage early without a prepayment penalty by paying more toward the principal.)
4. Get Rid of Mortgage Insurance
Mortgage insurance, which is needed for some loans, can add a significant amount to your monthly payments. Luckily, there are ways to eliminate these payments, depending on which type of mortgage loan you have.
• Getting rid of the FHA mortgage insurance premium (MIP). Consider your loan origination date that impacts when you can get rid of the extra expense of mortgage insurance:
• July 1991 to December 2000: If your loan originated between these dates, you can’t cancel your MIP.
• January 2001 to June 3, 2013: Your MIP can be canceled once you have 22% equity in your home.
• June 3, 2013, and later: If you made a down payment of at least 10% percent, MIP will be canceled after 11 years. Otherwise, MIP will last for the life of the loan.
Another way to shed MIP is to refinance to a conventional loan with a private lender. Many FHA homeowners may have enough equity to refinance.
• Getting rid of private mortgage insurance (PMI) If you took out a conventional mortgage with less than 20% down, you’re likely paying PMI. Ditching your PMI is an excellent way to reduce your monthly bill.
To request that your PMI be eliminated, you’ll want to have 20% equity in your home, whether through your own payments or through home appreciation.
Thinking about starting a new home renovation project? Use this Home Improvement Cost Calculator to get an idea of what your project will cost.
Your lender must automatically terminate PMI on the date when your principal balance reaches 78% of the original value of your home. Check with your lender or loan program to see when and if you can get rid of your PMI.
5. Appeal Your Property Taxes
Here’s another way to lower your mortgage payments: Take a closer look at your property taxes. Your property taxes are based on an assessment of your house and land conducted by your county’s tax assessor. The higher they value your property, the more taxes you’ll pay.
If you think you’re paying too much in taxes, you can appeal the assessment. If you do, be prepared with examples of comparable properties in your area valued at less than your home. Or you may also show a professional appraisal.
To challenge an assessment, you can call your local tax assessor and ask about the appeals process.
6. Refinance Your Mortgage
One of the best ways to reduce monthly mortgage payments is to refinance your mortgage. Refinancing (not to be confused with a reverse mortgage) means replacing your current mortgage with a new one, with terms that better suit your current needs.
There are a number of signs that a mortgage refinance makes sense, such as lower interest rates being offered or the desire to secure a fixed rate when you have an adjustable rate mortgage.
Refinancing can result in a more favorable interest rate, a change in loan length, a reduced monthly payment, and a substantial reduction in the amount you owe over the life of your mortgage. Do note, however, that there are often fees for refinancing your mortgage.
Tips on Lowering Your Mortgage Payment
If you’re serious about lowering your mortgage payments, consider these methods:
• Refinance to get a lower rate or other changes in your mortgage’s terms
• Apply a windfall (a tax refund, say, or a bonus) to your mortgage’s principal
• Reach enough equity in your home to drop mortgage insurance
• Make extra mortgage payments or higher mortgage payments (this can build equity or pay off the loan sooner, saving you interest)
• Ask about loan modification or forbearance programs if you are struggling to make payments.
Recommended: First-time Homebuyer Programs
The Takeaway
How to lower your mortgage payment? There are several possible ways. And who wouldn’t love to shrink their house payment? You might look at strategies to build equity and ditch mortgage insurance, extend the terms of your loan, or refinance to reduce your monthly payment.
If refinancing could help, see what SoFi offers. Both refinancing and cash-out refinancing are possible. And SoFi also offers a range of flexible home mortgage loans with competitive rates to help you make homeownership that much more affordable. Plus, our online process is fast and simple.
Ready to see how much simpler a SoFi Home Mortgage Loan can be?
FAQ
How can I make my mortgage payment go down?
There are several ways to lower your monthly mortgage payment. A few options: You could refinance at a lower rate or longer term, or you could build enough equity to forgo mortgage insurance.
How can I lower my house payment without refinancing?
To lower your house payment without refinancing, you could appeal to lower your property taxes; you might apply a windfall to lower your principal; or you could rent out part of your property to bring in more income.
What is the average mortgage payment?
According to the C2ER’s 2022 Annual Cost of Living index, the average monthly mortgage payment in the U.S. is $1,768.
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Last week, I announced that Kris and I have refinanced our mortgage at 4.96% for 30 years. In the comments, Ian expressed disappointment that we’d opted for the longer term when we could have afforded to take out a 15 year mortgage at 4.625%. “Starting your 30 years over is no way to get rich slowly,” he wrote.
He has a point.
Kris and I took out the 30-year mortgage because we wanted a safety net. We will continue to pay $2,000 each month toward our mortgage, so we could have afforded the shorter term, but we opted to take a longer mortgage so that we had a cushion if something happened.
But was this a smart move? How much will it cost us to do this? Let’s find out.
Running the Numbers
You all know that I love to play with spreadsheets. I pieced one together to run the numbers on our mortgage. Just for curiosity’s sake, I first looked at what might have happened if we had not refinanced at all and planned to repay the old loan on a normal schedule (you can play with actual mortgage rates get current numbers):
Existing mortgage pre-refinance
Principal remaining: $206,345.33 Interest rate: 6.25% Total payments remaining: 303 (25 years, 3 months) Regular payment amount: $1386.60 Total repaid: $420,139.80 Total interest paid: $213,794.47 Interest/Principal: 103.61%
Now, here are the totals if we were to pay the refinanced, 30-year mortgage without any sort of acceleration. Note that the payment amount does not include taxes and insurance (which adds another $280.21 to our monthly obligation).
30-year without acceleration
Principal borrowed: $212,900 Interest rate: 4.96% Total payments: 360 (30 years) Regular payment amount: $1137.69 Total repaid: $409,568.40 Total interest paid: $196,668.40 Interest/Principal: 92.38%
By refinancing, we’re saving $10,571.40, even if we don’t pay extra, and even if we stretch the loan out to 30 years. Next, I looked at a 15-year mortgage without any sort of acceleration.
15-year without acceleration
Principal borrowed: $212,900 Interest rate: 4.625% Total payments: 180 (15 years) Regular payment amount: $1642.30 Total repaid: $295,614.00 Total interest paid: $82,714.00 Interest/Principal: 38.85%
Clearly, a 15-year mortgage is a better option — if you can afford to make the payments, which in this case would cost an extra $504.61 every month. (And if inflation isn’t running rampant. I have not accounted for inflation in any of these scenarios.)
But Kris and I pay more than the minimum. We pay a flat $2,000. If we subtract $280.21 for taxes and insurance, that means we’ll be paying $1719.79 toward principal and interest each month. How does this affect our costs? Let’s look at the 30-year loan with accelerated payments:
30-year with acceleration
Principal borrowed: $212,900 Interest rate: 4.96% Total payments: 174 (14 years, 6 months) Regular payment amount: $1719.79 ($1327.97 final month) Total repaid: $298,851.64 Total interest paid: $85,951.64 Interest/Principal: 40.37%
This is the plan we intend to follow. For us, there is a huge difference in the total we pay (and how long it takes us to pay it) between an accelerated and a non-accelerated 30-year mortgage. We save over $110,000 and 15 years by making extra payments.
But we will still pay more interest than if we had taken the 15-year mortgage. What about accelerating the 15-year mortgage? Let’s look:
15-year with acceleration
Principal borrowed: $212,900 Interest rate: 4.625% Total payments: 169 (14 years, 1 month) Regular payment amount: $1719.79 ($960.31 final month) Total repaid: $289,885.03 Total interest paid: $76,985.03 Interest/Principal: 36.16%
Financially, this is the best option of all. But it only shaves 11 months and about $6,000 from the standard 15-year option. Ian may be right: it might have made more sense for us to take a 15-year loan.
Doing What Works For Us
Let’s assume that Kris and I are going to be able to make our $2,000 payments every month for the next 15 (or so years). If we had opted for the lower-rate 15-year loan instead of accelerating the 30-year loan, we would have the debt paid off five months earlier. What’s more, we would save $8,966.61 in interest payments, or roughly $640 per year ($53 per month).
Ian’s point — and it’s a good one — is that although Kris and I saved $250 per month by refinancing, we could have saved another $50 per month (with no changes to our current plans!) by choosing a 15-year mortgage instead of a 30-year mortgage.
Did we make the wrong decision? Time will tell. If nothing happens along the way, then this will have been a poor choice. But if we experience some sort of financial setback, our caution just might save our bacon. With the lower payments of the 30-year option, we could live indefinitely on either one of our salaries alone. As with all investments, lower risk brings lower reward — and that’s the choice we made this time.
What choice would you have made and why? I suspect that many GRS readers opt for 30-year mortgages when they could afford the higher payments and the shorter term. I know that we’re certainly not the only ones among our friends who have done this!
Note: I did not save the spreadsheet that I used to run these numbers. If you’re wanting to do similar math, check out the mortgage calculators at Dinktown.
Average mortgage rates fell just a little last Friday. But last Thursday’s massive jump means they finished that week — and last month — higher than when they started them.
First thing, it was looking as if mortgage rates today might again barely budge. But that could change as the hours pass.
Markets will be closed tomorrow for the Independence Day holiday. And we’ll be back on Wednesday morning. Enjoy your celebrations!
Current mortgage and refinance rates
Program
Mortgage Rate
APR*
Change
Conventional 30-year fixed
7.129%
7.158%
Unchanged
Conventional 15-year fixed
6.638%
6.651%
Unchanged
Conventional 20-year fixed
7.506%
7.558%
Unchanged
Conventional 10-year fixed
6.997%
7.115%
Unchanged
30-year fixed FHA
6.672%
7.303%
Unchanged
15-year fixed FHA
6.763%
7.237%
Unchanged
30-year fixed VA
6.729%
6.937%
Unchanged
15-year fixed VA
6.625%
6.965%
Unchanged
5/1 ARM Conventional
6.75%
7.266%
Unchanged
5/1 ARM FHA
6.75%
7.532%
+0.11
5/1 ARM VA
6.75%
7.532%
+0.11
Rates are provided by our partner network, and may not reflect the market. Your rate might be different. Click here for a personalized rate quote. See our rate assumptions See our rate assumptions here.
Should you lock a mortgage rate today?
Recent reporting in the financial media makes me think mortgage rates are unlikely to see any significant and sustained falls until at least the fourth (Oct.-Dec.) quarter of 2023 and probably not until 2024.
And that’s why my personal rate lock recommendations remain:
LOCK if closing in 7 days
LOCK if closing in 15 days
LOCK if closing in 30 days
LOCK if closing in 45 days
LOCK if closing in 60days
However, with so much uncertainty at the moment, your instincts could easily turn out to be as good as mine — or better. So let your gut and your own tolerance for risk help guide you.
>Related: 7 Tips to get the best refinance rate
Market data affecting today’s mortgage rates
Here’s a snapshot of the state of play this morning at about 9:50 a.m. (ET). The data, compared with roughly the same time last Friday, were:
The yield on 10-year Treasury notes edged down to 3.82% from 3.85%. (Good for mortgage rates.) More than any other market, mortgage rates typically tend to follow these particular Treasury bond yields
Major stock indexes were mostly lower. (Good for mortgage rates.) When investors buy shares, they’re often selling bonds, which pushes those prices down and increases yields and mortgage rates. The opposite may happen when indexes are lower. But this is an imperfect relationship
Oil prices inched up to $70.61 from $70.25 a barrel. (Neutral for mortgage rates*.) Energy prices play a prominent role in creating inflation and also point to future economic activity
Goldprices rose to $1,930 from $1,919 an ounce. (Neutral for mortgage rates*.) It is generally better for rates when gold prices rise and worse when they fall. Gold tends to rise when investors worry about the economy.
CNN Business Fear & Greed index — climbed to 84 from 80 out of 100. (Bad for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are often better than higher ones
*A movement of less than $20 on gold prices or 40 cents on oil ones is a change of 1% or less. So we only count meaningful differences as good or bad for mortgage rates.
Caveats about markets and rates
Before the pandemic and the Federal Reserve’s interventions in the mortgage market, you could look at the above figures and make a pretty good guess about what would happen to mortgage rates that day. But that’s no longer the case. We still make daily calls. And are usually right. But our record for accuracy won’t achieve its former high levels until things settle down.
So, use markets only as a rough guide. Because they have to be exceptionally strong or weak to rely on them. But, with that caveat, mortgage rates today might again hold steady or close to steady. However, be aware that “intraday swings” (when rates change speed or direction during the day) are a common feature right now.
Important notes on today’s mortgage rates
Here are some things you need to know:
Typically, mortgage rates go up when the economy’s doing well and down when it’s in trouble. But there are exceptions. Read ‘How mortgage rates are determined and why you should care’
Only “top-tier” borrowers (with stellar credit scores, big down payments, and very healthy finances) get the ultralow mortgage rates you’ll see advertised
Lenders vary. Yours may or may not follow the crowd when it comes to daily rate movements — though they all usually follow the broader trend over time
When daily rate changes are small, some lenders will adjust closing costs and leave their rate cards the same
Refinance rates are typically close to those for purchases.
A lot is going on at the moment. And nobody can claim to know with certainty what will happen to mortgage rates in the coming hours, days, weeks or months.
What’s driving mortgage rates today?
Currently
To see sustained lower mortgage rates we need to see the inflation rate halving, the economy weakening, and the Federal Reserve stopping hiking general interest rates. And none of those looks likely anytime soon.
Some progress is being made on inflation. But not enough.
And the economy is showing extraordinary resilience. Last week’s gross domestic product (GDP) headline figure was 50% higher than many expected.
Meanwhile, the Fed seems highly likely to hike general interest rates by 25 basis points (0.25%) on Jul. 26. And there may well be at least one more increase after that in 2023.
Recession
As I’ve written before, our best hope for lower mortgage rates is a recession. That should weaken the economy, reduce inflation and perhaps cause the Fed to at least hold general rates steady.
Economists have been predicting an imminent recession for ages. And, not so long ago, I bought that line and was expecting one at any moment.
But, now, many big hitters aren’t expecting a recession until 2024. Yesterday, CNN Business listed a few of those making that prediction:
Bank of America CEO Brian Moynihan
Vanguard economists
JPMorgan Chase economists
Of course, others disagree, as economists always do. Some think a recession will still land later this year. And others believe there will be no recession at all.
This week
There are a few reports this week that could send mortgage rates up or down a bit. But Friday’s jobs report is the one most likely to have a decisive impact.
The consensus among economists is that the report will show 240,000 new jobs created in June compared with 339,000 in May. Anything lower than 240,000 might see mortgage rates tumble, which would be great.
However, we’ve witnessed economists making similar predictions for employment several times over recent months. And, nearly every time, their forecasts have greatly underestimated the resilience of the American labor market and therefore the American economy.
Of course, they might be right this time. Let’s hope so. But I shouldn’t hold my breath if I were you.
Please read the weekend edition of this daily report for more background on what’s happening to mortgage rates.
Recent trends
According to Freddie Mac’s archives, the weekly all-time low for mortgage rates was set on Jan. 7, 2021, when it stood at 2.65% for conventional, 30-year, fixed-rate mortgages.
Freddie’s Jun. 29 report put that same weekly average at 6.71%, up from the previous week’s 6.67%. But Freddie is almost always out of date by the time it announces its weekly figures.
In November, Freddie stopped including discount points in its forecasts. It has also delayed until later in the day the time at which it publishes its Thursday reports. Andwe now update this section on Fridays.
Expert mortgage rate forecasts
Looking further ahead, Fannie Mae and the Mortgage Bankers Association (MBA) each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.
And here are their rate forecasts for the current quarter (Q2/23) and the following three quarters (Q3/23, Q4/23 and Q1/24).
The numbers in the table below are for 30-year, fixed-rate mortgages. Fannie’s were published on May 23 and the MBA’s on Jun. 21.
In the past, we included Freddie Mac’s forecasts. But it seems to have given up on publishing those.
Forecaster
Q2/23
Q3/23
Q4/23
Q1/24
Fannie Mae
6.4%
6.2%
6.0%
5.8%
MBA
6.5%
6.2%
5.8%
5.6%
Of course, given so many unknowables, the whole current crop of forecasts might be even more speculative than usual. And their past record for accuracy hasn’t been wildly impressive.
Find your lowest rate today
You should comparison shop widely, no matter what sort of mortgage you want. Federal regulator the Consumer Financial Protection Bureau found in May 2023:
“Mortgage borrowers are paying around $100 a month more depending on which lender they choose, for the same type of loan and the same consumer characteristics (such as credit score and down payment).”
In other words, over the lifetime of a 30-year loan, homebuyers who don’t bother to get quotes from multiple lenders risk losing an average of $36,000. What could you do with that sort of money?
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.
How your mortgage interest rate is determined
Mortgage and refinance rates vary a lot depending on each borrower’s unique situation.
Factors that determine your mortgage interest rate include:
Overall strength of the economy — A strong economy usually means higher rates, while a weaker one can push current mortgage rates down to promote borrowing
Lender capacity — When a lender is very busy, it will increase rates to deter new business and give its loan officers some breathing room
Property type (condo, single-family, town house, etc.) — A primary residence, meaning a home you plan to live in full time, will have a lower interest rate. Investment properties, second homes, and vacation homes have higher mortgage rates
Loan-to-value ratio (determined by your down payment) — Your loan-to-value ratio (LTV) compares your loan amount to the value of the home. A lower LTV, meaning a bigger down payment, gets you a lower mortgage rate
Debt-To-Income ratio — This number compares your total monthly debts to your pretax income. The more debt you currently have, the less room you’ll have in your budget for a mortgage payment
Loan term — Loans with a shorter term (like a 15-year mortgage) typically have lower rates than a 30-year loan term
Borrower’s credit score — Typically the higher your credit score is, the lower your mortgage rate, and vice versa
Mortgage discount points — Borrowers have the option to buy discount points or ‘mortgage points’ at closing. These let you pay money upfront to lower your interest rate
Remember, every mortgage lender weighs these factors a little differently.
To find the best rate for your situation, you’ll want to get personalized estimates from a few different lenders.
Are refinance rates the same as mortgage rates?
Rates for a home purchase and mortgage refinance are often similar.
However, some lenders will charge more for a refinance under certain circumstances.
Typically when rates fall, homeowners rush to refinance. They see an opportunity to lock in a lower rate and payment for the rest of their loan.
This creates a tidal wave of new work for mortgage lenders.
Unfortunately, some lenders don’t have the capacity or crew to process a large number of refinance loan applications.
In this case, a lender might raise its rates to deter new business and give loan officers time to process loans currently in the pipeline.
Also, cashing out equity can result in a higher rate when refinancing.
Cash-out refinances pose a greater risk for mortgage lenders, so they’re often priced higher than new home purchases and rate-term refinances.
How to get the lowest mortgage or refinance rate
Since rates can vary, always shop around when buying a house or refinancing a mortgage.
Comparison shopping can potentially save thousands, even tens of thousands of dollars over the life of your loan.
Here are a few tips to keep in mind:
1. Get multiple quotes
Many borrowers make the mistake of accepting the first mortgage or refinance offer they receive.
Some simply go with the bank they use for checking and savings since that can seem easiest.
However, your bank might not offer the best mortgage deal for you. And if you’re refinancing, your financial situation may have changed enough that your current lender is no longer your best bet.
So get multiple quotes from at least three different lenders to find the right one for you.
2. Compare Loan Estimates
When shopping for a mortgage or refinance, lenders will provide a Loan Estimate that breaks down important costs associated with the loan.
You’ll want to read these Loan Estimates carefully and compare costs and fees line-by-line, including:
Interest rate
Annual percentage rate (APR)
Monthly mortgage payment
Loan origination fees
Rate lock fees
Closing costs
Remember, the lowest interest rate isn’t always the best deal.
Annual percentage rate (APR) can help you compare the ‘real’ cost of two loans. It estimates your total yearly cost including interest and fees.
Also pay close attention to your closing costs.
Some lenders may bring their rates down by charging more upfront via discount points. These can add thousands to your out-of-pocket costs.
3. Negotiate your mortgage rate
You can also negotiate your mortgage rate to get a better deal.
Let’s say you get loan estimates from two lenders. Lender A offers the better rate, but you prefer your loan terms from Lender B. Talk to Lender B and see if they can beat the former’s pricing.
You might be surprised to find that a lender is willing to give you a lower interest rate in order to keep your business.
And if they’re not, keep shopping — there’s a good chance someone will.
Fixed-rate mortgage vs. adjustable-rate mortgage: Which is right for you?
Mortgage borrowers can choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM).
Fixed-rate mortgages (FRMs) have interest rates that never change, unless you decide to refinance. This results in predictable monthly payments and stability over the life of your loan.
Adjustable-rate loans have a low interest rate that’s fixed for a set number of years (typically five or seven). After the initial fixed-rate period, the interest rate adjusts every year based on market conditions.
With each rate adjustment, a borrower’s mortgage rate can either increase, decrease, or stay the same. These loans are unpredictable since monthly payments can change each year.
Adjustable-rate mortgages are fitting for borrowers who expect to move before their first rate adjustment, or who can afford a higher future payment.
In most other cases, a fixed-rate mortgage is typically the safer and better choice.
Remember, if rates drop sharply, you are free to refinance and lock in a lower rate and payment later on.
How your credit score affects your mortgage rate
You don’t need a high credit score to qualify for a home purchase or refinance, but your credit score will affect your rate.
This is because credit history determines risk level.
Historically speaking, borrowers with higher credit scores are less likely to default on their mortgages, so they qualify for lower rates.
For the best rate, aim for a credit score of 720 or higher.
Mortgage programs that don’t require a high score include:
Conventional home loans — minimum 620 credit score
FHA loans — minimum 500 credit score (with a 10% down payment) or 580 (with a 3.5% down payment)
VA loans — no minimum credit score, but 620 is common
USDA loans — minimum 640 credit score
Ideally, you want to check your credit report and score at least 6 months before applying for a mortgage. This gives you time to sort out any errors and make sure your score is as high as possible.
If you’re ready to apply now, it’s still worth checking so you have a good idea of what loan programs you might qualify for and how your score will affect your rate.
You can get your credit report from AnnualCreditReport.com and your score from MyFico.com.
How big of a down payment do I need?
Nowadays, mortgage programs don’t require the conventional 20 percent down.
In fact, first-time home buyers put only 6 percent down on average.
Down payment minimums vary depending on the loan program. For example:
Conventional home loans require a down payment between 3% and 5%
FHA loans require 3.5% down
VA and USDA loans allow zero down payment
Jumbo loans typically require at least 5% to 10% down
Keep in mind, a higher down payment reduces your risk as a borrower and helps you negotiate a better mortgage rate.
If you are able to make a 20 percent down payment, you can avoid paying for mortgage insurance.
This is an added cost paid by the borrower, which protects their lender in case of default or foreclosure.
But a big down payment is not required.
For many people, it makes sense to make a smaller down payment in order to buy a house sooner and start building home equity.
Choosing the right type of home loan
No two mortgage loans are alike, so it’s important to know your options and choose the right type of mortgage.
The five main types of mortgages include:
Fixed-rate mortgage (FRM)
Your interest rate remains the same over the life of the loan. This is a good option for borrowers who expect to live in their homes long-term.
The most popular loan option is the 30-year mortgage, but 15- and 20-year terms are also commonly available.
Adjustable-rate mortgage (ARM)
Adjustable-rate loans have a fixed interest rate for the first few years. Then, your mortgage rate resets every year.
Your rate and payment can rise or fall annually depending on how the broader interest rate trends.
ARMs are ideal for borrowers who expect to move prior to their first rate adjustment (usually in 5 or 7 years).
For those who plan to stay in their home long-term, a fixed-rate mortgage is typically recommended.
Jumbo mortgage
A jumbo loan is a mortgage that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac.
In 2023, the conforming loan limit is $726,200 in most areas.
Jumbo loans are perfect for borrowers who need a larger loan to purchase a high-priced property, especially in big cities with high real estate values.
FHA mortgage
A government loan backed by the Federal Housing Administration for low- to moderate-income borrowers. FHA loans feature low credit score and down payment requirements.
VA mortgage
A government loan backed by the Department of Veterans Affairs. To be eligible, you must be active-duty military, a veteran, a Reservist or National Guard service member, or an eligible spouse.
VA loans allow no down payment and have exceptionally low mortgage rates.
USDA mortgage
USDA loans are a government program backed by the U.S. Department of Agriculture. They offer a no-down-payment solution for borrowers who purchase real estate in an eligible rural area. To qualify, your income must be at or below the local median.
Bank statement loan
Borrowers can qualify for a mortgage without tax returns, using their personal or business bank account. This is an option for self-employed or seasonally-employed borrowers.
Portfolio/Non-QM loan
These are mortgages that lenders don’t sell on the secondary mortgage market. This gives lenders the flexibility to set their own guidelines.
Non-QM loans may have lower credit score requirements, or offer low-down-payment options without mortgage insurance.
Choosing the right mortgage lender
The lender or loan program that’s right for one person might not be right for another.
Explore your options and then pick a loan based on your credit score, down payment, and financial goals, as well as local home prices.
Whether you’re getting a mortgage for a home purchase or a refinance, always shop around and compare rates and terms.
Typically, it only takes a few hours to get quotes from multiple lenders — and it could save you thousands in the long run.
Current mortgage rates methodology
We receive current mortgage rates each day from a network of mortgage lenders that offer home purchase and refinance loans. Mortgage rates shown here are based on sample borrower profiles that vary by loan type. See our full loan assumptions here.
Mortgage rates tickets slightly up but remain within the 6% to 7% range, according to Freddie Mac. (iStock)
Mortgage rates ticked slightly up, still hovering within the 6% to 7% range, but home sales show buyers are shrugging off the more expensive borrowing costs, according to Freddie Mac.
The average 30-year fixed-rate mortgage increased to 6.71% for the week ending June 29, according to Freddie Mac’s latest Primary Mortgage Market Survey. That’s up from the previous week when it averaged 6.67%. A year ago, the 30-year fixed-rate mortgage averaged 5.7%.
The average rate for a 15-year mortgage was 6.06%, up from 6.03% last week and up from 4.83% last year.
The slight shift marks another week that rates remain within the 6% to 7% range. However, a recovery in home sales may indicate that buyers are accepting the higher borrowing costs as the new normal, according to Freddie Mac Chief Economist Sam Khater.
“Mortgage rates have hovered in the six to seven percent range for over six months and, despite affordability headwinds, homebuyers have adjusted and driven new home sales to its highest level in more than a year,” Khater said. “New home sales have rebounded more robustly than the resale market due to a marginally greater supply of new construction.
“The improved demand has led to a firming of prices, which have now increased for several months in a row,” Khater continued.
If you are looking to buy a home, you can take advantage of lower mortgage rates and shop for the best rate on a loan. You can visit an online marketplace like Credible to compare rates, choose your loan term and get preapproved with multiple lenders at once.
THESE TWO FACTORS COULD BE DRIVING YOUR CAR INSURANCE COSTS UP
Interest rates could move higher
Federal Reserve Chair Jerome Powell said in a recent statement that inflation remains high and the process of getting it to a 2% target rate “has a long way to go.”
The central bank has already raised rates 10 times in 2022 and 2023 to bring inflation down to a 2% target. In June, it announced a much-anticipated pause on interest rate increases following continued moderation in inflation.
The interest rate increase means the federal funds rate will remain in a targeted range of 5% to 5.25%, the highest level in 16 years.
“With the Fed taking a breather from monetary tightening until its July meeting, capital markets are assessing the outlook for the second half of 2023,” Keeping Current Matters Chief Economist George Ratiu said in a statement. “On the upside, even with interest rates more than double what they were at the start of 2022, the economy continues to expand as consumers – buoyed by jobs and rising wages – manage to spend more on goods and services.
“On the downside, the Federal Reserve has been clear that inflation is still hotter than desired, and additional rate hikes are on the table,” Ratiu continued. “Based on the central bank’s forward guidance, we can expect two more rate increases in the months ahead.”
Despite the continued pressure on interest rates, mortgage rates are still expected to drop near 6% by the end of 2023, Realtor.com Chief Economist Jiayi Xu said in a statement.
If you’re trying to find the best mortgage rate, it can help to shop around. Visit the Credible marketplace to compare options from different lenders at once without affecting your credit score.
MORE STUDENTS TURNING TO FEDERAL AND PRIVATE STUDENT LOANS TO FINANCE COLLEGE: SURVEY
Construction of more affordable homes, increasing
Demand for affordability is driving the construction of more homes priced under $300,000, according to a report by Realtor.com. Early estimates in May indicate that homes within this price range constituted approximately 17% of total sales, marking the highest share since December 2021 (18%).
“Despite this encouraging news, there remains an urgent need for more homes at the most affordable price points, where the shortage of available inventory is most severe,” Xu said.
If you are ready to shop for a mortgage, you could get a better rate by looking at several lenders. Credible can help you compare interest rates from multiple mortgage lenders and choose the one with the best rate for you.
HOMEBUYERS ARE FINDING BETTER DEALS IN THESE CITIES, SURVEY SAYS
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
My husband and I are in the early stages of building a house. As we modify our floor plans, the amount we’ll need to borrow to build is on our minds. It’s probably going to be the most expensive thing we’ll ever purchase, and we need to decide what we want to borrow and what loan term we’ll want.
The main differences between 15- and 30-year loans are straightforward. Fifteen-year loans have higher monthly payments, but you pay less interest, while 30-year terms have lower monthly payments, but you pay significantly more for the house in the long run. As with most areas of personal finance, however, this decision is about more than just the math. There are other important considerations, such as retirement savings, risk tolerance, and discipline.
First, let’s take a look at the hard figures.
Crunching the Numbers
Let’s say that a 30-year-old borrower is buying a house for $160,000, and her marginal tax rate is 25 percent. At the time this article was written, 30-year loans were at 5 percent and 15-year loans were at 4.5 percent.
Using a mortgage calculator, we’ll compare the two mortgage terms by plugging in the mortgage amount and the 15- and 30-year interest rate.
A 30-year term would give a monthly payment of $859 (payment does not include taxes and insurance, which vary by locale). The borrower would pay $149,211 in interest, and $309,211 over the life of the loan.
A 15-year term would give a monthly payment of $1224. She’d pay $60,318 in interest, and $220,318 over the life of the loan.
The 30-year term lowers the monthly payment by $365 and will save the borrower $238 per year in taxes, but will cost $88,893 more in interest over the life of the loan, and she will own her home when she is 60 years old. The benefits of the 15-year term are the substantial savings in interest and the fact that she will own her home by the time she’s 45. The drawback is that her monthly payment will be higher.
The Wiggle-Room Option
But what about the option of taking a 30-year term and paying it off in 15 years? A 30-year term paid in 15 years would yield a monthly payment of $1265. The borrower would pay $67,749 in interest, and $227,749 over the life of the loan. She’ll own her home at age 45, assuming she makes the extra payment each month. But if she fell on hard times, she wouldn’t be locked into the higher payment.
Here’s a Comparison of Each Option:
It’s easy to see that the borrower will pay less for her home with the 15-year loan. But mortgages aren’t one-size-fits-all. There are other factors to consider when deciding what is right for you.
What Can You Afford?
In our example, the 30-year term works out to a monthly payment of $365 less than the 15-year term. If you couldn’t comfortably make the payment on the 15-year term, the 30-year term is the better option. You can always make extra payments when possible.
What is the State of Your Emergency Fund?
Once you sign the loan, you’ll be expected to make the same payment each month. If you take a 15-year term with a higher payment, you should have a substantial savings account in place to mitigate the risk from major unexpected expenses or job loss.
If you don’t have much of an emergency fund, you’re better off with a 30-year term, using the extra money to build your savings.
Will You be Able to Meet Your Retirement and Other Savings Goals?
If you’re leaning toward a 15-year term, be sure that you can still max out your retirement accounts and meet your other savings goals. If you can’t, stick with the 30-year term.
On the other hand, if retirement is still decades away, you are in a position to invest more aggressively. You should be able to ride out the volatility of relatively aggressive investments.
If retirement is less than 15 years away, it might be better to pay off the mortgage early for security and peace of mind.
How Do You Feel About Debt? What is Your Tolerance for Risk?
Many people are strongly averse to debt of any kind — and with good reason. Dave Ramsey is firmly in this camp, saying:
Don’t borrow money. Period. If I can’t get you to postpone the purchase that long, I strongly suggest you save a down payment of 20 percent or more, choose a 15-year (or less) fixed-rate mortgage, and limit your monthly payment to 25 percent or less of your monthly take-home pay.
Managing debt isn’t easy, and for many people, Ramsey’s hardcore anti-debt stance is the way to go.
But others are in a different place in the financial journey and are comfortable carrying mortgage debt if the borrowed funds can earn a higher rate of return somewhere else. Risk-adjusted returns need to be factored, but essentially, if you opted for the 30-year term at 5 percent, it’s reasonable to think you can earn a higher return with a portfolio of index funds. Account for the tax deductions and the 5 percent is even lower.
While it’s certainly possible to earn a higher return elsewhere, it comes down to your appetite for risk. You might get a better return by going with the 30-year term, but putting the money toward the mortgage is risk-free. Also, you have to decide if the extra money you might gain by investing elsewhere is more important to you that the peace of mind that comes with owning your home outright.
Personal Discipline
If you can afford the payments on a 15-year loan, but you’re concerned about the possibility of job loss or other major financial hits, you might be hesitant to commit to the higher payments. Another option is to take a 30-year term and pay it off in 15 years. You’ll pay slightly more in interest than with the 15-year interest rate, but still significantly less than with the 30-year loan.
The drawback is that most people lack the discipline. According to the Federal Deposit Insurance Corporation (FDIC), 97.3 percent of people do not consistently pay extra on their mortgages. Many people lack the discipline to send in the extra money every month when it’s not mandated by the bank. What this statistic doesn’t mention is how many of the 97 percent would have fallen behind on their mortgages if they were locked into a 15-year mortgage.
If you are already saving regularly and have only tapped your emergency fund for major unexpected expenses, however, you might have the discipline to pay your mortgage off in 15 years. But consumers who spend any monthly savings are better off with the shorter term if they can afford it.
What About the Tax Break?
While it’s true that you do get more of a tax break from a 30-year loan, it shouldn’t be the main consideration when deciding on a term. The 30-year borrower will pay less in yearly taxes than the 15-year borrower, but that’s because the 30-year borrower is paying significantly more interest.
In our example, the borrower would save an average of $238 per year in taxes with the 30-year loan, but will pay $88,893 more in interest over the life of the loan than she would with the 15-year term.
Which is Right For You?
In the end, your financial situation will determine the right mortgage term. If you can make the higher payment, have a substantial emergency fund, and can meet retirement and other savings goals, a 15-year mortgage is a good way to own the home in half the time and pay substantially less interest.
If just one of those conditions is not met, or if you are somewhat comfortable with debt and risk and wish to get a higher rate of return with other investments, the money saved each month with the 30-year mortgage payment may be better used elsewhere. You can always send in extra payments.
I’m still not sure which option is for us. What about you? Do you have a 15-year mortgage or 30-year mortgage? Do you prepay? What are your thoughts on risk versus higher returns?
My husband and I are in the early stages of building a house. As we modify our floor plans, the amount we’ll need to borrow to build is on our minds. It’s probably going to be the most expensive thing we’ll ever purchase, and we need to decide what we want to borrow and what loan term we’ll want.