So what is a good mortgage? What's a good interest rate on a mortgage for a first time property or home buyer? There are a number of factors that come into play, from debt to earnings and assets.
Right now, interest rates are extremely low since the Federal Reserve has kept rates low to stimulate the economy after the housing crisis. A good mortgage rate for first time buyers is anything below 5%, but again, there are a number of factors that determine the interest rate a lender will offer you.
Overall, as with buying any financial product, do research and ask a lot of questions. A good mortgage rate depends upon the individual and that person's goals. Mortgage rates change daily, not usually by leaps and bounds, but they do move on a regular basis depending upon what the Federal Reserve does.
Interest are usually set close to the yield on a ten year bond plus additional points that the lender or bank adds on based upon your risk level and their costs. Just look at how high interest rates were in the late 1970s and early part of the 1980s. Yes, they were sky high.
Essentially, interest rates are determined by supply and demand, inflation, and the how well the economy is doing. After the housing crash, interest rates were set to zero for an extending period of time to help stimulate the economy.
As a general rule, you should borrow no more than 2 or 2.5 times your collective earnings, but this doesn’t take into account past debt or say a raise or promotion that you know you are going to receive on a certain date.
Banks or lenders use a few different ratios to determine how much of a loan and mortgage rate they’ll give you. This is not taking into account points, which also go into figuring out how much your interest rate on your loan will be. The questions then is should you take on points for the future or pay them now. Paying them now is the best move, since if you don’t you’ll be paying interest on that money over the long haul. Really, if you have a lot of debt, then you’ll pay a higher mortgage rate. But don’t jump too soon with one lender, test the waters a bit and see what's out there.
- Front end or housing expense ratio—based on your income. No more than 28% of what you earn should go towards your mortgage.
- Total debt to income ratio or back end ratio is based on your income and other debt. No more than 36% of your monthly income should go towards debt payments, including your mortgage.
Another factor that determines your mortgage rate is how much you put down—the down payment itself. The amount you put down will not only help you negotiate for the property but give you a lower down payment.
Many times you’ll hear of the 20% rule: down payment is 20% of the total cost of the home, but this is a rough number. Figure out what you can afford now and in the future.
To determine a mortgage that will work for your income level, compare what you are now paying for rent and add on an additional amount—gauge what will work for you.
Do you want to change your lifestyle in order to move into your dream house? Meaning, are you going to cut out other expenses, vacations or other purchases, to buy the house you really want even though it’s a bit over your monthly budget.
Then there are closing costs—the transfer of ownership of the property. Closing costs could include title insurance, title searches, court filings, survey costs, and other expenses with settlement of the purchase.
Other determining factors for your mortgage:
- Number of incomes – are you the only one with a monthly income?
- College fund
- Other investments – is now the right time to buy?
- Home repairs – is the house new or old?
- Are there H.O.A fees or covenants that require some form of payment?
- Stable income or does it fluctuate based on seasonal factors or is just up and down
- FICO Score
Sample for a few FICO scores in the table below: How your credit score can affect your monthly payments, based on a 30-year fixed-rate mortgage for a $300,000 home loan:
Good rule of thumb, referenced for any type of loan or credit, whether a mortgage or a credit card – just because you have credit or a loan, doesn’t mean you should use it all. Just because you qualify for a huge loan you might not want to buy a mansion. Think long term and don’t make a rash decision, go with what you’re comfortable and have an emergency back up plan.
Warning: Be aware of mortgage brokers, don’t be afraid, just take into account that the broker might be getting paid by a lender if you purchase a certain mortgage, and one at a higher rate or what that's not in your best interest. A number of people accepted adjustable rate mortgages when they didn't even realize they were they were - if you can believe it.
Tips when talking to a broker:
- Shop around and ask questions
- Document all of your assets and income – usually you’ll get a better rate if you can do this, and if you don’t, you might only qualify for a risky loan
- Bring a friend or someone who has experience with mortgage loans
Loan to Value Ratio
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