Since I write about personal finance for a living, I thought I had a solid grasp on mortgage loans and could handle buying a house with one no problem.
However, the reality of my experience was much more confusing and complicated than I expected. Throw in a big jump in mortgage rates today as well, and I had a few moments of sheer panic throughout my home-buying experience.
From the time I started shopping for a mortgage to the time I closed on my home, mortgage rates rose 0.75 percent. Although mortgage rates today are still relatively low, this increase was one of the biggest jumps mortgage rates have made, week-to-week, in years.
Now that I’ve closed on my home purchase earlier this month, I can now say there are some moves I’m definitely proud of — as well as some things I’d do differently the next time around.
1. Lock in a mortgage rate ASAP
I applied for pre-approval for mortgage loan at the end of October, just a few weeks before the U.S. presidential election.
The rates we qualified for were in the 3.50% range. That was right around the average for a 30-year fixed-rate mortgage loan at that time, according to Freddie Mac.
Then on November 11 after Election Day, a backup offer we’d put in on a house was accepted, and we went into escrow. We were one step closer to becoming homeowners
The week after that, I was on a work trip, and my husband was holding down the fort taking care of our two kids solo. With things being so busy, we waited until after my trip to compare loan options and decide on one.
Therefore, we didn’t lock in a mortgage rate at that point. In fact, later on, my husband told me he wasn’t even aware at the time that locking in a rate was something we had to request to do.
By the time we regrouped, it had been almost two weeks since Donald Trump became the U.S. President-elect, and mortgage rates had gone up by half a percentage point, the biggest increase in years.
Here’s a chart from Freddie Mac illustrating mortgage rates today, and the jump that ensued.
What’s more, our loan officer from the mortgage company we were working with sent over some paperwork with a new rate we hadn’t seen before of 4.50%. That was significantly more than the 3.50% we were expecting.
While the market was adjusting for a Trump presidency, both homebuyers (like me) and lenders were surprised by the jump in mortgage rates.
Facing a higher rate, I decided to revisit my mortgage options and do some intense cost comparisons.
2. Pay attention to mortgage rates today
My biggest regret from my mortgage process is not paying more attention to changes in mortgage rates.
If I had noticed sooner that they were ticking up, I might have locked in my rate sooner. I’d have a better rate than the 4.125% I ultimately got.
If you’re heading into escrow, pay attention to mortgage rates today. Check on them daily. This way you won’t be caught off-guard by a rate jump like I was.
Once I did start paying attention to rates, my loan officer said he thought they would “settle,” or decrease slightly, in the coming weeks. But no one can guarantee what mortgage rates will do, and it didn’t look promising.
Therefore, I went ahead and locked in our rate. This ultimately helped me avoid more headaches as mortgage rates continued to rise.
3. Compare, compare compare
Before applying for pre-approval on a mortgage loan, I compared interest rates between lenders and read customer reviews. At each stage of the home-buying and borrowing process, I made a point to shop around and make sure I was getting a good deal.
After I’d gone into escrow and was quoted a much higher 4.50% interest rate, I definitely kicked my comparison-shopping into high gear. I got new quotes from a few other lenders, both from local financial institutions and big national ones.
However, we were being quoted similar interest rates from various mortgage lenders. So after talking through our options, my husband and I decided to stick with our original mortgage company.
Still, I’m glad I took the time to double-check that I was getting a fair deal. That way I wasn’t second-guessing my choices later on.
4. Consider all your loan options
When I asked my loan officer about the 4.50% interest rate, he explained the jump in mortgage rates.
But he also pointed out that the interest rate we were quoted was for a mortgage loan with lender-paid mortgage insurance (PMI). To offset its PMI costs, the lender charged an interest rate that was about .375% higher on this product.
This lender-paid PMI mortgage made sense to use as borrowers when mortgage rates were lower. But facing a mortgage rate greater than 4.00%, I was definitely motivated to go back to the drawing board and compare all of my financing options again.
I got an overview of all my options and carefully reviewed them. I went through comparing the costs of each option so there would be no more surprises.
5. Double check what your loan officer says
Keep in mind that the loan officer’s job is to make mortgage products sound attractive to borrowers like you or me.
For instance, our officer whom we liked working with told us several times “you won’t have to pay any PMI” with the lender-paid PMI option we’d originally been interested in.
While this was technically true, he was less clear about the fact that the PMI costs were rolled into a higher mortgage rate, instead.
So if you’re getting a mortgage loan, watch out for tricky statements like this one. Do your due diligence on top of speaking with the loan officer to ensure you’re getting a good deal. Ask a lot of questions about the costs and fees attached to each loan product.
6. Define what “affordable” means for you
With the jump in mortgage rates, I could no longer get the both of best worlds I was hoping for — a rate under 4.00% and lender-paid PMI. I had to figure out which costs I was willing to stomach, and soon.
As I compared our lender’s options, I had to decide what was most important to me. Did I want to put the least amount of money down possible? Or get a lower monthly payment? What about getting the best mortgage rate?
Ultimately, I decided that getting the lowest mortgage rate possible was important to me. So was having the lowest monthly payment possible.
Perhaps as a home buyer, your financial priorities are different than mine. But knowing what you want regarding mortgage affordability is vital when picking the best loan for your situation.
7. Use calculators to compare different loan options
A big help to me when I was comparing different mortgage options were loan calculators.
Even though they’re built for student loans, I used Student Loan Hero’s calculators to do comparisons. They work just as well for comparing any installment loans, including mortgages.
In comparing these options, I realized that that .375% interest rate increase on a lender-paid PMI loan was a big deal to me. It added an extra $75 a month to my mortgage payments.
And, while my out-of-pocket costs were $75 higher a month, my total interest costs were actually $182 higher. With a 30-year loan, that’s a difference of more than $27,000. Here’s a distinction I might not have noticed looking at only at the estimates sent over by my loan officer.
Take a look below. The original loan is the one with the interest rate increase.
On top of that, with the higher-rate option, an additional $107 of my mortgage payments would go towards interest rather than the principal.
Below you can see the $107 difference between the interest for the original loan (which has the higher rate thanks to the lender-paid PMI) and the new loan.
I decided to suck it up and pay the PMI to get the lower interest rate on our mortgage. Now I had to choose whether I would pay a monthly PMI payment of $168, or a single upfront PMI payment of $7,000.
If I went the monthly route, it would take me about seven-and-a-half years to reach the 22 percent equity requirement of about $15,000. Then I would be done with my monthly payments of $168.
But, if I paid a single upfront PMI payment of $7,000 instead, that would be the equivalent of about three-and-a-half years worth of PMI monthly payments. And we planned to be in the home for at least five years.
Paying it all upfront also removed the monthly PMI costs, which helped me achieve my secondary goal of lowering our monthly payments. Although it took a big chunk out of our savings, it was a trade-off I could live with.
8. Buy the least amount of house you need
When mortgage rates change and jump up, many home buyers can adjust their costs and still afford a home.
For us, a $75 increase in our monthly mortgage costs sucked — but it wasn’t a deal-breaker. That’s in large part because we were focused on keeping our costs affordable from the start.
We limited our house-buying budget to about half of the amount we were approved to borrow from our lender. And we aimed to keep our mortgage payments around 25-30 percent of our monthly income.
Sticking to our budget made a big difference in being able to afford our choice. Even when mortgage rates rose up.
9. Keep mortgage rates today in perspective
At the end of the day, mortgage rates today are still pretty great.
They’re only slightly higher than they were a year ago when they were just under 4.00% for a 30-year fixed-rate mortgage. And they’re historically low compared to mortgage rates 10, 20 or 30 years ago.
My husband was understandably frustrated with our higher-than-expected mortgage rate. But after he recently re-watched “Rocky II,” in which the titular character’s mortgage rate is 9.50%, our 4.125% rate didn’t sound so bad anymore.
10. Become a homeowner when you’re ready
The main thing that helped hold back the panic as mortgage rates rose was that my husband and I were ready, financially and mentally, to be homeowners.
We had a decent amount saved for buying a home, on top of emergency savings and retirement accounts. We were also willing to face the extra costs of buying and owning a home, compared to renting one.
And, we viewed buying a home not solely as a financial decision or investment, but as a lifestyle choice. Having a home gave us benefits we valued, like greater privacy.
We didn’t rush into making a choice to avoid higher home prices or rising rates. We had saved and prepared for this step, then took it. And within the housing market and current rates environment, we worked to get the best deal for us.