Mortgage rates are at historic lows, so it could be a good time to buy a home. But you may be wondering whether there is a downside to low rates.
In short — nope, there’s no catch. A low APR can save you thousands over the life of your loan.
Granted, you’ll pay fees when you buy a home, but the current low rates don’t come with anymore fine print than usual.
If affordability is your main priority, then there are still two things to keep in mind before you scoop up the lowest rate you can find: the type of loan and private mortgage insurance (PMI).
ARMs have the lowest rates, but your APR can increase later
When buying a home, you’ll choose between two basic types of loans: a fixed-rate or an adjustable-rate mortgage.
With a fixed-rate mortgage, you commit to the same APR for the entire life of your loan. If you take out a 30-year mortgage, you’ll pay the same rate all 30 years, unless you refinance.
Adjustable-rate mortgages (ARMs) lock in your APR for the first few years, then change your rate periodically. For example, a 7/1 ARM secures your rate for the first seven years, then your APR changes every year.
ARM rates typically start lower than fixed-rate mortgages, which can make them more appealing to people who value finding the best rate possible.
“If they choose an adjustable rate mortgage, when rates are low, they need to consider rates could be higher when the loan begins to adjust,” Shelby McDaniels, Executive Director of Corporate Relocation at Chase Home Lending, told Business Insider.
You may choose an ARM over a fixed-rate mortgage because the ARM rate is lower right now. But when it starts to adjust every year, you could end up paying more than if you had just chosen a fixed-rate mortgage. But if you expect to move out of the home before the ARM rate changes, this type of mortgage could be a great option. You’d snag a lower rate but never face a fluctuating APR.
Fixed-rate mortgages and ARMs each have their pros and cons, so it’s important to consider which is the better fit for you.
You’ll probably pay PMI if you make less than a 20% down payment
Low rates might have you thinking about buying a home sooner rather than later — even if it means having less money for a down payment.
Not only will a smaller down payment result in a higher rate, but it could also force you to pay private mortgage insurance (PMI).
Private mortgage insurance is a type of insurance that protects the lender should you fail to make payments. Most lenders require you to get PMI if your down payment is less than 20% of the home value.
According to insurance-comparison website Policygenius, PMI can cost between 0.2% and 2% of your loan principal per year. If your mortgage is $200,000, you could pay an additional fee between $400 and $4,000 per year until you’ve paid off 20% of your home value and no longer have to make PMI payments.
Before snatching the lowest rate possible, consider which will be more expensive: a higher rate or PMI.
Fannie Mae’s June Housing Forecast predicted rates would stay low well into 2021, so you probably don’t need to rush to buy right away. You might have time to save more for a down payment, pay less in PMI, and land a low rate all at the same time.
