Why Refinance Rates Are Higher Than Purchase Loan Rates

Mortgage interest rates dropped dramatically over the summer, to the point where home loans have never been cheaper in most of our adult lifetimes. With rates at historic lows, you might’ve considered taking advantage of them, either by purchasing a new home or refinancing your current mortgage.

Recent figures from Freddie Mac show that mortgage refinances surged in the first quarter of 2020, with nearly $400 billion first home loans refinanced. However, as it turns out, refinancing your mortgage might actually be more expensive than purchasing a new home. 

This surprised us, too — why would there be a difference at all? 

We investigated how refinancing rates and new purchase home loan rates are set, and found several reasons for this rate disparity. On top of the rate difference, mortgage refinancing is even more difficult to qualify for, given the current economy.

Before rushing to refinance your home, read on to gather the information you need to make the right financial decision for your situation.

Pandemic Effects on Home Lending

Just as mortgage rates have stumbled, banks and lenders have tightened the screws on borrowers due to COVID-19, requiring higher credit scores and down payment amounts. Chase, for example, raised its minimum FICO score requirements for home purchases and refinances to 700 with a down payment requirement of at least 20%. 

Low rates have also driven a massive move to mortgage refinances. According to the same Freddie Mac report, 42% of homeowners who refinanced did so at a higher loan amount so they could “cash out.”

Unfortunately, homeowners who want to refinance might face the same stringent loan requirements as those who are taking out a purchase loan. Mortgage refinance rates are also generally higher than home purchase rates for a handful of reasons, all of which can make refinancing considerably less appealing. 

How Refinance Rates Are Priced

Although some lenders might not make it obvious that their refinance rates are higher, others make the higher prices for a home refinance clear. When you head to the mortgage section on the Wells Fargo website, for example, it lists rates for home purchases and refinances separately, with a .625 difference in rates for a thirty-year home loan. 

There are a few reasons why big banks might charge higher rates to refinance, including:

Added Refinance Fees

In August of 2020, Fannie Mae and Freddie Mac announced it was tacking on a .5% fee on refinance mortgages starting on September 1. This fee will be assessed on cash-out refinances and no cash-out refinances. According to Freddie Mac, the new fee was introduced “as a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty.”

By making refinancing more costly, lenders can taper the number of refinance loans they have to process, giving them more time to focus on purchase loans and other business.

Lenders Restraining New Application Volume

Demand for mortgage refinancing has been so high that some lenders are unable to handle all requests. Reluctant to add more employees to handle a surge that won’t last forever, many lenders are simply limiting the number of refinance applications they process, or setting additional terms that limit the number of loans that might qualify.

Also note that some lenders are prioritizing new purchase loans over mortgage refinance applications since new home buyers have deadlines to meet. With the housing market also on an upswing in many parts of the country, many major banks and lenders simply can’t keep up.

Rate Locks Cost Money

Generally speaking, it costs lenders more to lock the rate for refinance loans when compared to purchase loans. This is leaving lenders disinterested in allocating resources on the recent surge in mortgage refinance applications.

This is especially true since many refinancers might lock in a rate with one provider but switch lenders and lock in a rate again if interest rates go down. Lenders exist to turn a profit, after all, and it makes sense they would spend their time on loans that provide the greatest return.

Tighter Requirements Due to COVID-19

According to the Brookings Institute, Fannie Mae and Freddie Mac have been asking lenders to make sure any disruption to a borrower’s employment or income due to COVID-19 won’t impact their ability to repay their loan. 

Many lenders are also increasing the minimum credit score borrowers must have while making other requirements harder to meet. As an example, U.S. Bank increased its minimum credit score requirement to 680 for mortgage customers, and it also implemented a maximum debt-to-income ratio of 50 percent.

This combination of factors can make it difficult to save as much money with a refinance, or to even find a lender that’s willing to process your application. With this in mind, run the math and to see if refinancing is right for your situation before contacting a mortgage lender.

How Mortgage Purchase Rates Are Priced

Mortgage purchase rates are priced using a similar method as refinance rates. When you apply for a home mortgage, the lender looks at factors like your credit score, your income, your down payment and your other debt to determine your eligibility.

The overall economy also plays a giant role in mortgage rates for home loans, including purchase loans and refinance loans. Mortgage rates tend to go up during periods of speedy economic growth, and they tend to drop during periods of slower economic growth. Meanwhile, inflation can also play a role. Low levels of inflation contribute to lower interest rates on mortgage loans and other financial products.

Mortgage lenders can also price their loans based on the amount of business they have coming in, and whether they have the capacity to process more loans. They might lower rates to drum up business or raise rates when they’re at or nearing capacity. This is part of the reason rates can vary among lenders, and why it always makes sense to shop around for a home loan.

Many people believe that the Federal Reserve sets mortgage rates, but this is not exactly true. The Federal Reserve sets the federal funds rate, which lenders use to ensure they meet mandated cash reserve requirements. When the Fed raises this rate, banks have to pay more to borrow from one another, and these costs are often passed on to consumers. Likewise, costs can go down when the Fed lowers the federal funds rate, which can mean lower costs and interest rates for borrowers.

The Bottom Line

Refinancing your existing mortgage can absolutely make sense in terms of interest savings, but don’t rule out buying a new home instead. Buying a new home could help you save money on interest and get the space and the features you really want. 

Remember, there are steps you can take to become a more attractive borrower whether you choose to refinance or invest in a new place. You can’t control the economy or the Federal Reserve, but you have control over your personal finances.

Improving your credit score right away, and paying down debt to lower your debt-to-income ratio are just a couple of strategies to start. And if you’re planning on buying a new home, make sure you save a hefty down payment amount. These steps help you improve your chances at getting the best rates and terms whether you choose to move or stick with the home you have. 

The post Why Refinance Rates Are Higher Than Purchase Loan Rates appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

5 Myths About Transitioning From Renter to Homeowner

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Making the leap from being a renter to becoming a homeowner is a process that includes taking stock of your financial situation and determining whether you’re ready for such a massive responsibility. For most people, the primary question is affordability. Do you have enough cash in the bank to fund a down payment, or do you have a credit score high enough to qualify you for a home loan? But there are other considerations, too—and plenty of misconceptions and myths that could keep you from making that first step.

Below, our experts weigh in on why some situations that may seem like roadblocks are actually not as daunting as they appear.

1. Buying a home means heavy debt

Some may argue that continuing to rent can spare you from taking on heavy debt. But owning a house offers advantages.

“Buying a home and using a typical loan would be spread out over 20 to 30 years. But if you can make one extra payment a year or make bimonthly payments instead, you can shed up to seven years from that long-term loan,” says Jesse McManus, a real estate agent for Big Block Realty in San Diego, CA.

Plus, as you pay your mortgage, you gain equity in the home and create an asset that can be used when needed, such as paying off debt or even buying a second home.

“Currently, mortgage interests rates are at their lowest point in history, so … it’s a great time to borrow money,” McManus says.

2. At least a 20% down payment is needed to buy a home

“Contrary to popular belief, a 20% down payment is not required to purchase a home,” says Natalie Klinefelter, broker/owner of the Legacy Real Estate Co. in San Diego, CA. “There are several low down payment options available to all types of buyers.”

These are as low as 0% down for Veterans Affairs loans to 5% for conventional loans.

One of the main reasons buyers assume they must put down 20% is that without a 20% down payment, buyers typically face private mortgage insurance payments that add to the monthly loan payment.

“The good news is once 20% equity is reached in a home, the buyer can eliminate PMI. This is usually accomplished by refinancing their loan, ultimately lowering their original payment that included PMI,” says Klinefelter. “Selecting the right loan type for a buyer’s needs and the property condition is essential before purchasing a home.”

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Watch: 5 Things First-Time Home Buyers Must Know

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3. Your credit score needs to be perfect

Having a credit score at or above 660 looks great to mortgage lenders, but if yours is lagging, there’s still hope.

“Credit score and history play a significant role in a buyer’s ability to obtain a home loan, but it doesn’t mean a buyer needs squeaky-clean credit. There are many loan solutions for buyers who have a lower than the ideal credit score,” says Klinefelter.

She says government-backed loans insured by the Federal Housing Administration have lower credit and income requirements than most conventional loans.

“A lower down payment is also a benefit of FHA loans. Lenders often work with home buyers upfront to discuss how to improve their credit to obtain a loan most suitable for their needs and financial situation,” says Klinefelter.

McManus says buyers building credit can also use a home loan to bolster their scores and create a foundation for future borrowing and creditworthiness.

4. Now is a bad time to buy

Buying a home at the right time—during a buyer’s market or when interest rates are low—is considered a smart money move. But don’t let the fear of buying at the “wrong time” stop you from moving forward. If you feel like you’ve found a good deal, experts say there is truly no bad time to buy a home.

“The famous saying in real estate is ‘I don’t have a crystal ball,’ meaning no one can predict exactly where the market will be at a given time. If a buyer stays within their means and has a financial contingency plan in place if the market adjusts over time, it is the right time to buy,” says Klinefelter.

5. You’ll be stuck and can’t relocate

Some people may be hesitant to buy because it means staying put in the same location.

“I always advise my clients that they should plan to stay in a newly purchased home for a minimum of three years,” says McManus. “You can ride out most market swings if they happen, and it also gives you a sense of connection to your new space.”

In a healthy market, McManus says homeowners will likely be able to sell the home within a year or two if they need to move, or they can consider renting out the property.

“There is always a way out of a real estate asset; knowing how and when to exit is the key,” says Klinefelter.

The post 5 Myths About Transitioning From Renter to Homeowner appeared first on Real Estate News & Insights | realtor.com®.

Source: realtor.com

GSCU Mortgage Rates Reviews: Today’s Best Analysis

Granite State Credit Union (GSCU) provides members with a variety of mortgage products across the state of New Hampshire.

GSCU AT A GLANCE

Year Founded 1945
Coverage Area New Hampshire 
HQ Address 1415 Elm Street, Manchester, New Hampshire 03101
Phone Number 1-800-645-4728

 

GSCU COMPANY INFORMATION

  • Services the state of New Hampshire
  • Offers conventional loans, such as fixed- and adjustable-rate mortgages
  • Provides FHA and VA loans to qualifying individuals
  • Allows first-time homebuyers to make down payments of zero to three percent
  • Member of the NHCUL and CUNA
  • Allows borrowers to use gifted funds for the down payment and closing costs on certain loan products

Granite State Credit Union provides a variety of mortgage products to individuals across the state of New Hampshire. It offers traditional loans, such as fixed- and adjustable-rate mortgages, as well as government-assisted loans and options for individuals who cannot put 20 percent down on a new home.

GSCU Mortgage Facts

  • Services the state of New Hampshire
  • Offers conventional loans, such as fixed- and adjustable-rate mortgages
  • Provides FHA and VA loans to qualifying individuals
  • Allows first-time homebuyers to make down payments of zero to three percent
  • Member of the NHCUL and CUNA
  • Allows borrowers to use gifted funds for the down payment and closing costs on certain loan products

Overall

gscu mortgage rates reviewGranite State Credit Union provides a variety of mortgage products to individuals across the state of New Hampshire. It offers traditional loans, such as fixed- and adjustable-rate mortgages, as well as government-assisted loans and options for individuals who cannot put 20 percent down on a new home.

Current GSCU Mortgage Rates

GSCU Mortgage Products

Granite State Credit Union provides a variety of home mortgage products. Its offerings consist of traditional mortgages and government-assisted loans, as well as programs for first-time home-buyers and affordable home refinances.

Fixed-Rate Loans

Fixed-rate loans are the best choice for homebuyers who plan on staying in their home for an extended period. With fixed-rate loans, buyers can expect their principal and interest rates to remain the same throughout the loan’s lifetime. GSCU offers fixed-rate mortgages for lengths of 10, 15, 20, and 30 years.

Adjustable-Rate Loans

An adjustable-rate mortgage (ARM) provides borrowers with an interest rate that may vary throughout the loan term. Typically, these mortgages have a lower initial rate than fixed-rate loans, giving potential customers more financial freedom when looking for a new home.

After the initial period, the rates and payments associated with these mortgages may rise or fall to adjust to market prices. Typically, these costs will fluctuate on an annual basis.

Many companies, including GSCU, provide a cap that prevents these costs from getting too high from one year to the next. GSCU recommends these types of mortgages for home-buyers who do not plan on staying in the house for the loan’s full term. GSCU offers 1/1, 3/1, 5/1, and 7/1 ARMs.

First-Time Homebuyer Loans

GSCU offers excellent deals on mortgages for first-time buyers. The credit union gives borrowers the flexibility to choose a fixed- or adjustable-rate mortgage and even provides no and low down payment options to first-time buyers. The No Down Payment mortgage allows borrowers to take out a 5/1 ARM and pay zero percent down on the home.

The Low Down Payment Adjustable loan offers a 3 percent down payment with a 3/3 ARM and the option to refinance into a fixed mortgage if so desired. The Low Down Payment Fixed loan offers a 3 percent down payment and a 30-year fixed-rate mortgage. For Low Down Payment Adjustable and Fixed mortgages, borrowers can use gifted funds for the down payments and closing costs on their homes.

FHA Loans

Unlike some other credit unions, GSCU offers FHA loans to home-buyers who do not qualify for other loan programs. Borrowers may have a high debt-to-income ratio, low credit score, or the inability to put 20 percent down on the home. The Federal Housing Administration (FHA) created these types of home loans to grant buyers the opportunity to invest in property. GSCU allows 100 percent of the closing costs to be gifted.

VA Loans

GSCU allows veterans, military members, and their spouses to apply for VA loans. These types of mortgages are backed by the U.S. Department of Veterans Affairs (VA). Qualified individuals can make a low down payment on the home and keep up with affordable monthly payments.

HARP Loans

The Federal Housing Finance Agency (FHFA) introduced the Home Affordable Refinance Program (HARP) as part of their Making Home Affordable™ initiative. HARP allows eligible homeowners to refinance their mortgages into a lower interest rate to keep their finances secure. HARP provides this opportunity for individuals who otherwise may not qualify for refinancing due to their declining home value.

GSCU Mortgage Customer Experience

Granite State Credit Union offers a variety of online resources that help current and prospective borrowers research home loan options. GSCU’s website contains several mortgage calculators, which assist home-buyers in determining how much they can take out on a home loan.

It also provides information about their different mortgage products, which helps borrowers figure out what type of home loan is right for them. GSCU has a Refer-a-Loan option, which incentivizes borrowers who refer a New Hampshire resident or business owner to procure a loan with the credit union.

In exchange for this referral, both parties can receive $25 for consumer loans or $50 for the mortgage and home equity loans.

GSCU Lender Reputation

Founded in 1945, Granite State Credit Union has provided affordable mortgage rates to New Hampshire residents for over 70 years. Its Nationwide Mortgage Licensing System ID number is 477276.

Since the credit union only services the states of New Hampshire, it does not have many online customer reviews. It is not accredited by the Better Business Bureau, and has no reviews on the site, but maintains an A+ rating.

GSCU Mortgage Qualifications

Although GSCU has flexible mortgage qualifications for individuals taking out FHA loans, its qualification requirements for individuals requesting other home loans are similar to mortgage industry standards.

First and foremost, the credit union prioritizes credit score when approving someone for a loan or for calculating their rates. FICO reports that the industry-standard credit score is 740. However, those with credit scores above 760 can expect the best mortgage rates.

Credit score Quality Ease of approval
760+ Excellent Easy
700-759 Good Somewhat easy
621-699 Fair Moderate
620 and below Poor Somewhat difficult
No credit score n/a Difficult

Buyers should typically expect to put 20 percent down on the home, unless they qualify for a government-assisted loan. In some cases, buyers can anticipate paying as little as zero to three percent on their mortgage down payment.

With certain types of loans, such as first-time home-buyer, FHA, and VA loans, GSCU allows borrowers to use gifted funds to make down payments and pay closing costs. However, those taking out a traditional fixed- or adjustable-rate mortgage should anticipate paying these costs on their own.

History of GSCU

Granite State Credit Union (GSCU) was founded in 1945 in Manchester, New Hampshire. Founder John Edward Grace, who previously worked as a city bus driver, put down an initial deposit of $15.

With the work put forth by John and his wife, Betty, GSCU achieved notability and success before merging, in late 2003, with the Acorn Credit Union. GSCU is currently a member of the New Hampshire Credit Union League (NHCUL) and Credit Union National Association (CUNA). It offers a selection of home loan products, including fixed- and adjustable-rate, VA, FHA, HARP, and first-time home-buyer loans.

Bottom Line

If you live in New Hampshire, GSCU may be a great fit for you! With a variety of mortgage products, GSCU has something to offer for everyone. For more information, visit their website. 

The post GSCU Mortgage Rates Reviews: Today’s Best Analysis appeared first on Good Financial Cents®.

Source: goodfinancialcents.com