Mortgage and Refinance Review
Why Mortgage and Refinance Online?
The top performers in our review are LendingTree, the Gold Award winner; CitiMortgage, the Silver Award winner; and Quicken Loans, the Bronze Award winner. Here’s more on choosing a system to meet your needs, along with detail on how we arrived at our ranking of 10 loan providers.
Mortgage & Refinancing Loans
Purchasing a home will likely be the largest purchase you ever make and the one with the longest commitment. Finding the right mortgage from the right company requires careful research and understanding of the loan process. The following explains the basics of receiving your first mortgage loan and refinancing options. For more information and tips, have a look at our articles on mortgage options.
First-Time Mortgage Borrowers: The First Steps
Before You Go to a Lender
If you are buying your first home, it is a momentous occasion worthy of a celebration. However, before you even go to a lender, you want to have a few things in order and to understand what affects the loan amount you can receive as well as the associated interest rate.
Your credit is a factor, and it is something you have been working on your whole life. Excellent credit can get you a larger loan and better rates, but you may still qualify with good credit as well. Most lenders prefer a credit score of 660 or higher, but some lenders accept as low as 580. Debt-to-income (DTI) ratio plays a part as well. Most lenders like a DTI below 36 percent, but as with your credit score, so many factors are considered that a high DTI ratio in itself will not likely disqualify you.
A down payment is a good idea if you can afford one, especially to keep your interest rate and monthly payments low. In an ideal scenario, you would have around 20 percent of your loan saved a down payment. However, if it is not feasible to have a 20 percent down payment, you may be eligible for an FHA loan discussed above. With FHA loans, 3.5 percent is a common down payment. You will likely be responsible for closing costs and other fees when you complete your loan as well, so keep in mind there will be additional fees you must pay.
Look into what current rates are for your price range and your area. You always want to understand the difference between interest rates and APRs as you will see both these figures and they always slightly differ. Interest rate is the cost of borrowing the amount of your loan while APR includes the rates as other costs, including fees, discount points and occasionally closing costs. You can purchase discount points to lower your interest rates before closing on your loan. Essentially, you pay for a lower rate by purchasing points from the lender that lower your interest rate before closing. Points can also be viewed as prepaid interest. Most lenders offer to sell between one and four points, and generally, one point is equal to one percent of the loan amount.
Finally, do some research and know how much home you can afford. You can find mortgage calculators online that estimate the loan amount you can handle based on credit, income, debt-to-income and other factors. After that point, you can start shopping around for lenders to start receiving offers and see what type of loan you qualify for.
What You Will Pay: PITI
Your mortgage costs are comprised of four main elements known as PITI: principal, interest, taxes and insurance.
The principal is the base amount of your loan – the amount you require to purchase your home. Interest is what you pay for borrowing the principal. Rates depend on a number of factors considered when you apply for your loan, such as loan amount, credit score and employment history. A portion of your monthly payment also goes to taxes and insurance. Most commonly, these two amounts are put into an escrow account until they are paid to the proper entities.
Refinancing Your Loan: When to Do It, and When to Not
One of the most popular reasons to refinance is to take advantage of current market rates that are lower than the rate at which you first received your mortgage. A second reason is mortgage loan consolidations. If you have a first and second mortgage, you may be eligible to consolidate them into a single monthly payment. Refinancing may also be an option after a marriage or divorce to change names on the mortgage and deed.
Keep in mind that when you refinance, you are essentially taking out a new mortgage, so you will likely be paying a new origination fee, closing costs and other fees associated with processing this new loan.
There are times when refinancing is not a good idea. One reason is if you do not plan to be in your home for much longer. Because of the additional fees mentioned above, staying in your home may be the cheaper alternative. A second reason not to refinance is if you are upside in your loan and owe more than your home is worth. A HARP loan might be a good alternative if you meet the requirements, which include your mortgage being sold to Fannie Mae or Freddie Mac before June, 2009. Have a look at our HARP Loans site for more information.
Types of Mortgage & Refinancing Loans
Fixed-Rate Mortgage: As its name suggests, a fixed-rate mortgage comes with a set interest rate over the life of the loan, which is typically 15 or 30 years for a first mortgage. The most attractive feature of a fixed rate is that you can predict what your mortgage payments will be. Local taxes may affect your payment, but what you pay on principal and interest remains the same. The least attractive feature is that your closing costs will likely be higher than with an adjustable rate mortgage.
Rates are always subject to change, but current fixed rates over the last few months average around 4 percent for 30-year loans and 3.2 percent for 15-year loans. If you receive your loan when interest rates are low, a fixed-rate mortgage will benefit you because even if rates increase in the future, your rate will stay the same. The opposite is also true, however, that if rates go even lower, you are stuck with the higher rate unless you choose to refinance your loan, which requires additional closing costs and other fees.
Adjustable-Rate Mortgage (ARM): Adjustable-rate loans typically come with a fixed rate for a certain number of years, after which point the rate becomes adjustable. For example, a 5-year ARM comes with a fixed rate for five years and then the rates adjust and change over the remaining years of the loan, most commonly changing every year. All lenders are required to have a rate cap, which is the highest percentage your rate may increase to, which protects you from paying extreme rates. Most companies set this cap at around 18 percent.
Benefits of ARMs are your closing costs are typically lower and your initial fixed-rate period often has lower rates than a fixed-rate mortgage, though only temporarily. Average rates – though always subject to change – are currently around 2.6 percent for the first five years of a 5-year ARM. The downside is after the fixed-rate period ends, your rates will fluctuate to reflect the current industry rates, usually every year, so you cannot predict what your monthly payments may be for any future year. The rates may flux higher than what you would have with a fixed rate, so the risk is you may pay more over the course of your loan. On the other hand, those rates may also drop below what you would have received for a fixed rate.
Federal Housing Administration (FHA) Loans: Often, first-time homebuyers will have neither the credit nor a sufficient down payment to qualify for a standard mortgage loan, so they choose instead to take out an FHA loan. This type of mortgage loan is insured by the FHA and requires the borrowers to pay for mortgage insurance, protecting the lender from loss in case the borrower defaults.
With the mortgage insurance, you are responsible for two premiums. The first is an upfront premium payment of 1.75 percent. The second is the annual premium, which varies depending on the length of the loan and your down payment amount. Either way, these annual premiums range from 0.45 percent up to 0.85 percent.
FHA loans can have fixed rates or adjustable rates just like traditional loans, and the interest rates are comparable and vary depending on how you qualify, including credit score and the down payment you can put down, as discussed below.
The good that comes from an FHA loan is that many who would not qualify for a standard loan may still find themselves homeowners. Rather than a recommended 20 percent down payment, with an FHA loan, you may have as little as 3.5 percent with a credit score of 580 or higher, 10 percent if your credit score is 500 to 579. Those with credit scores lower than 500 do not qualify for an FHA loan.
Refinancing Loans: You have two choices for refinance. One option is rate-and-term refinancing, which entails refinancing the remaining balance on your loan to take advantage of lower interest rates that are available.
Cash-out refinance is an option where you refinance your mortgage but for more than the remaining balance and keep the additional money. This may be a course of action if you need additional money instead of wanting to pay less each month. While a rate-and-term loan intends to lower rates and adjusting terms, the primary purpose of most cash-out loans is the cash received, though lower cost may also apply.
Construction Loans: The borrower uses this type of loan to build a home. The borrowed amount starts a construction loan while the house is being built. Construction loans typically come with terms of one year and come with higher rates than a standard mortgage loan. After construction is complete, you receive a certificate-of-occupancy and all contractors are paid, the loan rolls over to a standalone mortgage with standard loan rates depending on the type you choose.
A risk of these types of loans is that construction might cost more than expected. Typically, there will be ongoing inspections from the lender to determine the value and cost of construction.
Interest Only/Jumbo Loans: Less common loan options include interest-only loans and jumbo loans. A jumbo mortgage loan exceeds the Office of Federal Housing Enterprise Oversight (OFHEO) conforming loan limits, which applies to loans over $417,000. These are higher-risk loans and typically come with higher interest rates.
Interest-only loans allow the borrower to only pay interest over a certain number of years – five or ten – rather than pay against the principal amount, which remains untouched during the interest-only period. After the predetermined period, the loan reverts to a typical mortgage loan where the borrower pays both interest and principal, meaning monthly payments will increase.
These initially lower mortgage payments can be a good idea for and benefit those expecting an increase in pay in the coming few years. But you should avoid these types of loans if you cannot afford the higher payments after the interest-only period.
Elements of Your Loan You Should Understand
Whether you are looking to take out a mortgage or to refinance, in essence, these options are both mortgage loans, so the process and eligibility requirements are very similar. The rates and fees are also very similar.
Eligibility & Process
As discussed above, qualifying for a loan depends on many factors that figure into your ability and likelihood to repay a loan. Mortgage companies look at your credit history and your credit score. Your employment history is a factor, including income and length of time at your current employer and in your current field. Your monthly income is weighed against your monthly costs to determine what type of payment you can afford. Your income is further weighed against your total debt to see if you can afford your loan over the long term.
You need to provide all of your personal information, including income and employment. You will likely be required to provide two or three years' worth of tax returns. The company will pull a credit report and consider all of your information when determining both if you qualify for a loan and the amount of loan you qualify for.
Rates & Fees
With interest rates and APRs, as discussed above, many factors determine your rates, and they differ from lender to lender. LendingTree is a good place to start as it is a broker and searches through its network of lenders to find the best loan options for you. Then you can see what type of rates you qualify for. Keep in mind that rates for mortgage loans are constantly in flux.
One option with mortgages is to have a fixed rate, which means your interest rate stays the same and your monthly payments do not change, with the exception of floating local taxes affecting escrow amounts. While the differences of rates between companies may seem relatively insignificant, a few percentage points can make an enormous difference over 30 years, so finding the lowest fees is important.
You may also have an adjustable-rate mortgage (ARM), which means your interest rate may go up or down, usually each year after the fixed-rate term ends, as explained above. Companies should specify a rate cap, which is the highest your ARM rate may go. Some companies may also set a floor, which is the lowest you can expect your rate to drop.
You can expect to pay certain fees no matter which service you choose. Origination and closing fees are standard, and while some companies may waive closing costs as an incentive, you cannot count on that generosity. Other fees may include an appraisal fee, which should be a third-party appraiser. Keep in mind that by law, lenders are no longer allowed to have in-house appraisers as they did in the past.
Some companies may charge a fee for loan maintenance, though not all do. Other services may charge a fee for early payoff of your loan, so make sure you know if the company you choose charges that fee. None of the companies on our lineup charge early pay-off fees. However, some of the companies that waive closing or origination costs may expect you to pay them if you pay off your loan early.
Payments & Terms
The longer the term for a loan, the lower your monthly payments are, but also the longer you are paying interest. The most common term for a mortgage loan is 30 years, though you may be eligible for 15-year loan depending on a number of factors. Other loan terms range from 10 years up to 40 years, but again, the average person will most often receive a set, 30-year loan.
Monthly payments include principal, interest, taxes and most insurance, or PITI as discussed above. The first years of your loan, you are mostly paying down interest, so your mortgage balance will not drop significantly. In fact, you may only payoff a few thousand dollars of your principal amount in your first five or 10 years of mortgage payments, depending on your total payment, total mortgage and other factors.
How We Evaluated: What We Found
To evaluate these companies, we contacted them with different scenarios representing typical borrowers searching for a mortgage loan. When contacting the company, we presented a test scenario as a customer seeking rates for both a fixed 30-year and 5/1 30-year ARM mortgage. We verified the accuracy and consistency of advertised information and information we received from other agents. We determined the knowledgeability of customer service, its transparency and willingness to divulge information, and the over-all quality of our experience with the loan process and interaction with the companies.
Rates, Fees & Terms
We found that most companies were consistent in their advertised rates versus what we were quoted when we called in. We found that LendingTree offered the best range for rates, starting as low as around 2.75 percent for fixed rates and around 2.4 percent for variable rates. Quicken Loans also has some of the lowest rates of the companies we reviewed. For fees, we were impressed with the closing costs figures CitiMortgage and ditech quoted for us. Most companies don't charge an early payoff fee, which is a benefit if you are ever able to pay off your loan before the end of the agreed-upon term.
When considering eligibility, we looked at what companies prefer to see but also what they will likely accept. For example, the preferred credit score is around 660, but many companies will accept lower than that, including Prospect Mortgage, which accepts as low as 580 in some cases. With your personal history, most companies prefer to see an employment history of a couple of years in the same field, but Network Capital will consider employment history of only six months with a salary-paying career.
The application and underwriting process were factors we considered. On average, the entire process from start to finish takes around 30 days. This time varies depending on a number of factors, but Network Capital states that its process can be completed in as little as 10 days, and Bank of America in as little as 17 days.
Customer Experience & Support
We also considered the overall customer experience, including the service you receive from representatives based on our experiences contact customer service. We had positive experiences with Wells Fargo, which has courteous and knowledgeable representatives willing to explain practices and loan features to us. We also had a very good experience with U.S. Bank's customer service when we contacted it as a prospective customer. We found Prospect Mortgage to have a quick turnaround time with its emails, which provided clear and direct answers to our questions.
Our Verdict & Recommendation
When choosing a mortgage loan, there are many aspects to consider, but what it costs you, either now or later, should be the biggest consideration. With interest rates, fractions of percentages add up, so shopping around for the lowest rates is the best idea as they are always changing. However, choosing a broker, such as LendingTree, is great choice. It finds the best rates from lenders so you have options. Actual lenders can provide comparable rates as well, including Quicken Loans.
Qualifying for a loan depends on the loan amount, loan type and your personal history. While there are industry preferences for most of the factors that affect your eligibility, some companies are willing to bend the requirements from time to time if other figures balance out. If you have less than great credit, Prospect Mortgage may accept scores as low as 580. If you do not have enough money to make a large down payment, you may qualify for an FHA loan with companies who offer them, which includes all companies on our lineup.
The overall experience with the company matters too, especially considering you will be working with them for potentially three decades. Our best experiences came with Wells Fargo and U.S. Bank.
When choosing a mortgage company, we recommend shopping around. We have provided the best mortgage and refinance companies, which is a good place to start. Look for the lowest rates available with a company, and go from there. If you are concerned about qualifying, find companies with less-strict eligibility requirements. And in the end, make sure you agree to work with a company that will work with you.