As part of Wealth's homebuyer's playbook, Redfin chief economist Daryl Fairweather joins Brad Smith on Wealth to outline what prospective homebuyers need to know about different loan options and share tips for getting the best home loan.
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It's housing week on wealth and we have the Home Buyer's playbook with everything that you need to know every step of the way for the home buying process from the planning stages to the closing process to the first year of home ownership. And today, we're outlining different mortgage and loan options for prospective buyers. Joining me now. We've got a good friend of the show, Daryl Fairweather, who is the Redfin Chief Economist, Daryl. Great to see you. What are some of the basics that prospective home buyers need to know as they start looking at mortgage options?
So, the first choice to make is whether you want a fixed rate mortgage or an adjustable rate mortgage. The tradeoff is that when you have a fixed rate, you know exactly what your monthly payments are going to be and they will stay that way for as long as you have the mortgage. With an adjustable rate, there is a fixed period that can last for different amounts of time, but then after that, the rate resets at whatever the market rate may be or some something approximating that. So, if you go with the adjustable, you're basically taking on more risk as a borrower because your rate can fluctuate with the market. That makes it cheaper for a lender to provide that loan and you get a better deal, but you're taking on that risk, so that's the downside. With a fixed rate, you pay a little bit more, but you have that that knowledge that it will always be the same. So you're taking some risk off of you.
And so our viewers hear us break this down every week with some of the updates for 15-year and 30-year fixed rate mortgages. But what are the core differences between the two?
Well, a 15-year mortgage, you're going to be paying off faster. So your payments are going to be higher each month, but you'll be paying less in interest because the term is shorter and that means that you aren't paying it for as long, so that alone means you're paying less in interest, but also you'll get a better rate because you are committing to the bank that you're going to pay off this loan faster, so that's more valuable to the lender to the bank. So if you have the money to do a 15-year or you're closer to retirement and you don't want to have a mortgage when you're 15 years out, then that could be a better option. But if you're buying a home, say as a young a younger person, uh you don't really have the money to to go to the 15-year, but you're going to be staying in the home for quite a long time, then a 30-year might be a better option.
Is it is it as simple as that or are there other types of home loans that we can consider?
Well, of course there are adjustable loans and part of the trade-off there is how long to keep your rate fixed. So that would be a 51 versus a 71, where you fix for five years versus seven years and then things reset. And then another option, which isn't so popular anymore, but it's still out there is having an interest only loan, where you are paying the interest first, not affecting your equity. That means you're going to be end up paying a lot more interest over time, but that can be a good option for people who plan to sell the house again in a short amount of time.
And so what are some tips to help prospective home buyers get the best mortgage?
Definitely shop around. You want to talk to multiple lenders. This is easier than ever nowadays because you can just go online, plug in your information, and you will get multiple lenders reaching out to you, telling you what their loan terms are. So it's super important to shop around. Also, look at that down payment. How much you put down is going to affect how good of a rate you get. The lower the down payment, generally, the higher the interest rate you're going to be paying. And also on top of that, you're borrowing way more money, so that's more, a higher interest rate on even more debt that you're taking out. So you can end up paying a lot more in interest if you have a small down payment. You can really reduce that interest amount if you put in a higher down payment.
And so as we kind of go through the calculus, or at least some of the prospective home buyers consider an existing home versus a new home, does that change the type of conversation that they're having with their potential mortgage lender?
Well, with new construction, sometimes the seller of the new construction will buy down your rate for you. That's been more common since interest rates went up and a lot of builders are just trying to make sales happen. You can also negotiate though with an existing homeowner who's selling for them to buy down your rate too. You can always ask for the seller to help you get a better rate. So, uh, with new construction, they're a little bit more willing to work on that. Another consideration with new construction is a lot of the times people are committing to buying the new construction before they fix their interest rate, and that can add risk to the situation because you really don't know what your monthly payment is going to be until you lock in that rate. So that's another consideration with new construction.
Daryl, congratulations on the new book as well. New book coming out on the shelves. Appreciate it.
Thank you.
Thank you.