Buying now
I’m buying a home now. What should I know?
How should I pick a mortgage?
Picking a mortgage is more than just shopping around for the lowest rate. You’ll also want to make sure you’ve got the right loan for your situation—including type, term, and more.
Here are some questions to ask yourself:
1. Will you take out a conventional loan?
For most people, the answer is yes—conventional loans are the most common type. Here’s a breakdown of how they compare to other loan types.
Conventional loans
Offered by private lenders, and not insured or guaranteed by the federal government
These can be conforming (meaning they follow Fannie Mae & Freddie Mac rules) or non-conforming
Non-conforming loans are less standardized and warrant a higher degree of scrutiny when you’re shopping around. Examples include:
Jumbo loans, which exceed loan limits set by the Federal Housing Finance Agency
Interest-only loans
Balloon payment loans
Government-backed and other options
Government-backed loans are insured or guaranteed by the federal government. They include FHA and VA loans, among other types
An FHA loan might make sense if you have a low credit score and are having trouble qualifying for a conventional loan
A VA loan might be advantageous if you or someone in your family is a veteran or service member
There are a broad range of other options for unique borrower scenarios
2. How much certainty do you want about your interest rate over time?
Some borrowers want to lock in an interest rate for the full length of the loan. Others might be comfortable allowing the rate change over time—particularly if it means a lower rate up front. Your preference will dictate which of the following you choose:
Adjustable-rate mortgage (ARM): This is a home loan with an interest rate that changes periodically after the end of the “fixed period,” which is the initial timeframe during which the interest rate stays the same. Often, the interest rate for an ARM during the fixed period will be about a quarter point to a half point lower than the rate you’d get on a 30-year fixed-rate mortgage. Your monthly principal and interest payments can change significantly after the end of the fixed period. ARMs are often referred to with two numbers: one indicating the length of the fixed period, and the second indicating how frequently the rate adjusts thereafter.
Example: A “5/6 ARM” will have a fixed interest rate for five years, and the rate will adjust every six months after that, within certain limits.
Why pick one? You might choose an ARM if you get an attractive initial interest rate and you are confident you will sell the home or pay off the entire loan before the fixed period expires. You might also choose one if you believe your financial situation will be different enough in five years that the risk of higher monthly payments is unlikely to be an issue (potentially due to career growth or a company liquidity event like an IPO).
Fixed-rate mortgage: This is a home loan with an interest rate that stays the same for the entire term of the loan. Your monthly principal and interest payments remain the same over time with a fixed-rate mortgage.
Example: A 30-year fixed-rate mortgage will have the same interest rate (and the same monthly payments) for 30 years.
Why pick one? A fixed-rate mortgage can make sense if you want to lock in your monthly principal and interest payments for a long period of time.
This decision boils down to your risk tolerance: If you take out an ARM with a lower interest rate today, are you willing to take the chance that the rate might go up in the future? A fixed-rate mortgage is generally more predictable.
3. How much time do you want to pay back the loan?
Your “mortgage term” is how long you have to repay the loan. Commonly, this will be 15, 20, or 30 years. Your mortgage term matters because it has a large impact on your monthly payments as well as your total interest costs.
Longer mortgage terms usually mean lower monthly payments (because you’re spreading the purchase out over time) but higher total interest costs (because you’re borrowing money for longer).
Shorter mortgage terms mean the opposite: your monthly payments are typically higher because you’re paying the loan off faster, but your total interest costs are lower because you don’t borrow money for as long.
4. Are points right for your situation?
Points (sometimes called “discount points”) are optional fees you pay directly to the lender at closing in exchange for a lower interest rate. One point is 1% of the total mortgage amount and usually lowers your rate by about 0.25%, although this can vary. The important thing is to figure out how long it will take the points to pay for themselves in the form of lower monthly payments. You should also think about the likelihood that you’ll refinance, because if you take out a new loan on your home, you don’t get the money you paid for your points back.
We’ll share a very simplified example (which assumes you have a 30-year fixed rate mortgage) to show how you can approach this.
Home purchase without points
Home price: $900,000
Down payment: $180,000
Loan amount: $720,000
Points: 0 points purchased for $0
Interest rate: 6.00%
Monthly principal & interest: $4,316.76
Home purchase with points
Home price: $900,000
Down payment: $180,000
Loan amount: $720,000
Points: 2 points purchased for $14,400, 0.25% each
Interest rate: 5.50%
Monthly principal & interest: $4,088.08
Are the points worth it? Multiply your monthly savings (in this case, $4,316.76−$4,088.08, or $228.68) by the number of months you expect to keep the loan and compare that to the cost of your points to help decide if points make sense. If the points cost more than they save you, you should probably skip buying them.
After 2 years: $5,488.32
After 5 years: $13,720.80
After 10 years: $27,441.60
As you can see, in this example, the up front cost of your points ($14,400) is higher than your savings until just over five years into your mortgage. Keep in mind that this example does not factor in the opportunity cost of spending $14,400 on points when that money otherwise could have been invested—but you can calculate that pretty easily using a calculator like this one.
Other things to keep in mind:
“Origination points” are not the same thing as discount points. Origination points are just lender fees expressed as a percentage of the amount you’re borrowing.
As a rule of thumb, buying discount points makes more sense if you plan to stay in your home (and keep your mortgage) for a long time.
What types of loans doesWealthfront Home Lending offer?
Wealthfront Home Lending offers conventional loans (including jumbo loans) with fixed or adjustable rates, with the option of points, for homebuyers and those looking to refinance in CO and TX, with CA and more states coming soon.
Our rates are ~0.50% below the national average, and you can manage the application process right in the Wealthfront app.
How should I pick a lender?
Don’t just rely on your real estate agent’s guidance
There are a lot of mortgage lenders out there, and your real estate agent might have strong recommendations (often based on personal relationships and previous experience, rather than a comprehensive knowledge of industry). It’s smart to do your own research and not just rely on their advice.
Figure out who offers the specific loan product you want
Not all lenders offer every type of loan. If you have a specific loan product in mind, start by building a list of lenders who offer that product. For example, Wealthfront Home Lending does not currently support VA or FHA loans—so if that’s your desired loan type, you’ll want to look elsewhere.
Shop around to see who has a competitive interest rate for the loan product you want
How to get a rate quote
Some lenders will make you go through the entire application process just to see a personalized rate, which can be time consuming. Others (like Wealthfront) will provide an estimate much earlier in the process so you can make an informed decision more easily. You can access Wealthfront’s rate calculator here.
Keep the following in mind as you shop around:
Don’t compare an interest rate to an annual percentage rate (APR): The interest rate on a mortgage tells you how much interest you’ll pay on your loan, but the APR covers the interest rate plus various other costs associated with your mortgage. Try to compare two interest rates.
Take points into account when you compare rates: Most lenders will display headline rates with different amounts of points, which can make it hard to get a true apples-to-apples comparison. As a workaround, you can try matching the rates across lenders and then comparing the number of points required to get it. Our rate calculator makes it easy to see a range of rates based on various numbers of points.
Keep an eye on fees: Beyond the interest rate, you’ll also want to look at section A fees (named for the section of the loan estimate form where they appear). These aren’t the only fees you’ll pay to get your loan, but they are established and charged by the lender—meaning that if they seem unreasonably high, you can pick another lender. You should also glance at section B fees (costs associated with third-party vendors chosen by the lender) like the appraisal fee. These fees vary less, and you can’t shop for them, but you can still pick another lender if they seem unusually high. Below, you can see where to find them on a Wealthfront Home Lending Loan Estimate.
Section A Fees
Established and charged by the lender
Section B Fees
associated with third-party vendors chosen by the lender
Sample Loan Estimate for illustrative purposes only. Not a loan offer. Actual rate, fees and terms will vary.
Section A Fees
Established and charged by the lender
Section B Fees
associated with third-party vendors chosen by the lender
Sample Loan Estimate for illustrative purposes only. Not a loan offer. Actual rate, fees and terms will vary.
Remember that rates and fees are often inversely correlated. A lender might offer a low rate, but make some of that up through higher fees (or vice versa). You’ll need to evaluate both fees and interest rates together in the context of a loan estimate to get a complete picture.
Don’t forget about experience
Your experience throughout the entire mortgage process—from your initial rate quote to closing—can vary a lot from lender to lender.
Traditional mortgage lenders tend to do a lot of business over the phone and by email. You can expect sales calls, significant back-and-forth, and a process that involves a good amount of paperwork. This process can be cumbersome and carry significant overhead costs—and these costs can show up in a few ways: your time, your interest rate, and the fees charged by your lender.
Digital mortgage lenders, including Wealthfront Home Lending, can offer a more streamlined experience (although there will still be variation from lender to lender). In Wealthfront’s case, that streamlining means lower overhead and thus lower costs for you. Wealthfront Home Lending offers rate estimates within seconds, an experience free of sales calls, and a digital process you can navigate yourself from our app or website (although our loan officers are available by phone and email if you need them, too).
Questions your lender should be able to answer easily
Michael Young, Director of Home Lending (NMLS #2360681) at Wealthfront, explains the questions your lender might be squirrelly about. If you can’t get a good answer to these questions—and fast—that can be a red flag.
What’s my rate?
If a lender makes you jump through a lot of hoops to see your estimated rate, it’s not a great sign. A lender who is confident in their rates won’t mind making it easy for you to shop around.
What are your fees?
Some lenders will deliberately underestimate their fees early in the loan process to make their offering appear more attractive. It can be hard to identify this practice (and fees do often change before closing for reasons that are not nefarious), but it’s worth asking what assumptions your lender is using when they provide an estimate so you can make sure they’re reasonable.
How soon can I refinance?
For a rate-and-term refinance on a conventional mortgage—where you’re lowering your rate or changing your loan term—there’s typically no waiting period. Cash-out refinances, where you tap your equity, require your current loan to be at least 12 months old. Some lenders may not technically want you to refinance in the first six months because they can lose the money they made originating the loan. Choose a lender you trust to help you refinance whenever it’s advantageous for you—not just for them.
How does pre-approval work?
When you start going to open houses, one of the first questions a seller’s broker is likely to ask you is whether you’re pre-approved yet. Here’s what you need to know.
Pre-approval: The basics
What is it? Pre-approval is a formal letter from your lender that states the specific loan amount you’re qualified to borrow, based on a thorough verification of your credit, income, and assets. Put more simply, it is documentation that shows how much a lender thinks you can afford, and it can help convince a seller to accept your offer.
When do you need it? It’s smart to get pre-approval before you start seriously looking at homes. That way, if you see something you like, you’ll be able to act quickly. Just remember that pre-approval letters also expire, usually in 1-3 months, so you might need to get a new one if you have a long search.
How do you get it? The process varies by lender and type of pre-approval (more on that below). But generally, you will share specific pieces of financial documentation with your lender so they can give you a letter stating the amount they’re conditionally willing to loan you to buy a home.
Types of pre-approval
Confusingly, there are a few different types of pre-approval, and they differ from lender to lender. Here’s a quick overview of the three main kinds:
Pre-qualification: Pre-qualification carries the least weight from a seller’s perspective, because it typically doesn’t involve an in-depth analysis of your finances—it’s really just an estimate. Pre-qualification is also the fastest type of pre-approval to get. It can provide you with some useful information if you’re early in the process and want to get a rough understanding of your potential budget.
Pre-approval: Regular pre-approval involves some analysis of your finances. You’ll likely need to provide documentation including pay stubs, tax returns, and bank statements. Typically, pre-approval also involves a credit check. As a result, pre-approval carries a higher level of validation than pre-qualification. If you’re seriously looking at homes, you should make sure you get a pre-approval letter.
Underwritten pre-approval: This kind of pre-approval carries the most weight with sellers, but it also takes the longest to get. It indicates that an underwriter has reviewed your finances in depth, and it’s most likely to help you close on a home quickly (if that’s something you’re concerned about) because it front-loads a significant portion of the underwriting process. Underwritten pre-approvals can be great in a really competitive market.
Documents needed for pre-approval
Different lenders will have slightly different requirements, and some are more document-heavy than others. The list below is not exhaustive, but it’s a good starting point:
Two most recent statements for all of your bank/investment/retirement accounts
Two most recent paystubs
W-2s for the past two years or, if you’re self-employed, your two most recent business tax returns
Two most recent personal tax returns
Pro tip: Tailor your pre-approval letter every time you make an offer
Wealthfront Lead Loan Officer Justin Saks (NMLS #928943) shares a tip to make the offer process go more smoothly—and explains how Wealthfront Home Lending makes it especially easy.
Let’s say your lender is willing to pre-approve you to borrow $500,000 but you’re making an offer on a home for which you only plan to borrow $400,000. You don’t necessarily want the seller to know you have room in your budget to pay a lot more, so it’s smart to revise your pre-approval letter to reflect the amount you actually plan to borrow.
Some lenders will require you to call or email them to make this change. Wealthfront Home Lending offers editable pre-approval letters right in our app. We’ll tell you the maximum amount you’re pre-approved for, and you can lower the number in the letter as needed throughout your home search—no need for back and forth with a loan officer.
How do the offer process and closing process work?
What happens when you submit an offer
You saw a home that checks the major boxes on your list, and the price seems right. The next step is to submit an offer (also called a purchase agreement), usually through your real estate agent. This is a legally binding contract between a buyer and seller that outlines the agreed-upon price, terms, and conditions for the sale of the property. Sometimes, a seller will submit a counter offer and you’ll need to decide whether or not the counter offer works for you—remember, you’ll still want to stay within your budget. But once you reach an agreement with the seller and both parties have signed, it’s official: You’re on your way to becoming a homeowner.
Next, it’s time to start chipping away at your final tasks before closing. Here’s what you need to start thinking about right away, and what can wait until closer to the end.
What to do as soon as your offer is accepted
Start getting your down payment ready to go: Often, buyers need some time to move money around before wiring their down payment to the title company. Now is the time to get your ducks in a row. Moving money around at the last minute can be stressful, and it’s a common reason for closing to get delayed. Don’t let it happen to you.
Pay your deposit (or “earnest money”): As soon as your offer is accepted, you’ll need to pay the deposit you agreed to in your contract. This deposit is often between 1% and 3% of the home price depending on the market (but it can be higher or lower), and it’s something you can negotiate with the seller—a higher deposit can make an offer stronger. Generally, the deposit is held in escrow by a title company. If and when you close on your home, you can apply this deposit to your closing costs or down payment. If you back out of the purchase for a reason not covered in your contract (covered reasons are called “contingencies”), you generally lose this deposit.
Finalize your application: This is the formal request you submit to your lender that contains your financial and property information. It’s used to determine eligibility and approval for a mortgage loan. If you’re working with Wealthfront Home Lending, this step is easy—by the time you reach this stage, your application is about 90% done already.
Figure out when you want to rate lock: Rate locking is the process of getting a guarantee from your lender that the interest rate and points will remain unchanged for a specific period—usually 30 days, but not always. Rate locking protects you from market fluctuations until the loan closes. Some lenders, including Wealthfront Home Lending, offer rate lock extensions (usually for a small fee) in case your closing is delayed. If you’re comfortable with your rate now, it’s best practice to go ahead and lock it—it’s a way of ensuring your monthly payments remain affordable. It’s very hard to predict if and how mortgage rates will move in the future.
Work with your lender to get an appraisal: This is when a professional, unbiased third party provides an estimate of what the property is worth. Ideally, the home will appraise for an amount that’s greater than or equal to the offer price. But this doesn’t always happen. If the home appraises for less than the offer price, there are a few paths you can take, including potentially putting down more cash to close the gap.
Start shopping for homeowners insurance: Your lender will require you to purchase a homeowner’s insurance policy in order to close. This insurance provides financial coverage to repair or rebuild the home (and potentially replace personal belongings) in the event of fire, theft, or other covered disasters. Because there’s so much regional variation in disasters and insurance policies, it’s smart to start shopping ASAP. You can pay for your policy at closing (more on that below).
What needs to happen right before closing
Make a decision about & get an invoice for your homeowner’s insurance policy: Your lender can use your invoice to pay for your policy at the same time as your other closing costs.
Receive your “clear to close” notification: Near the end of the home loan application process, the underwriter will give their final approval—this indicates that all loan conditions have been met and the lender is authorized to schedule the signing of the final documents and fund the mortgage. After this, your lender will be able to tell you exactly how much money to bring to closing, which means you can start scheduling wires. (When you do this, be very cautious of hacking and phishing attempts, which are on the rise—you should always call your settlement agent to confirm wiring instructions using a verified phone number.)
Complete your final walk-through: Before closing, you’ll take one last look at the home to make sure the home is in the condition you expect. If the seller agreed to any repairs, this is the right time to make sure they’ve been handled. Buyers usually do this a day or two before closing.
Close on your home: This is it! This is the final step in your home purchase process where you and the seller sign legal documents and, if you haven’t already, transfer funds. This is when ownership of the property is officially recorded and handed over.
What should I know about refinancing?
Refinancing is the process of replacing an existing mortgage with a new loan. Generally, it means you will pay closing costs again—which means you’ll want to consider whether the benefits of refinancing outweigh those costs. There are a few common reasons to refinance:
Refinancing to get a lower interest rate
Homeowners commonly refinance when mortgage rates have come down enough that the savings from lower monthly payments are enough to offset the cost of closing on a new loan. (You can read more about how to conduct a break-even analysis in this blog post.) Refinancing can lower your total interest costs significantly over the life of the loan.
For example:
Original mortgage
$500,000 principal remaining
7% interest rate, 30-year fixed rate
$3,326.51 monthly payment
$697,543.60 total interest cost over the life of the loan
Refinancing
$500,000 principal remaining
6.5% interest rate, 30-year fixed rate
$3,160.34 monthly payment
$637,722.40 total interest cost over the life of the loan
Wealthfront makes it easy to get a great rate when you refinance. Check out our rate calculator for a personalized, straightforward estimate in seconds.
Refinancing to change the type or term of the loan
Maybe you got an adjustable-rate mortgage and your monthly costs increased significantly when the fixed period ended. Or maybe you got a big raise and you want to switch from a 30-year fixed rate mortgage to a 15-year fixed rate mortgage so you can pay off the loan more quickly and pay less interest overall. These are both examples of reasons you might consider refinancing. Again, you should just make sure to weigh the benefit of refinancing against the closing costs you’ll incur.
Refinancing to convert home equity into cash (known as a “cash-out refinance”)
This is when you borrow more money than you currently owe on your home, allowing you to “cash out” some of your home equity. You might do this if you need to pay off other, higher interest debt or you have another pressing need for the funds but would otherwise need to borrow at a higher rate. Remember: Cash-out refinancing means your total loan amount will go up, which can raise your monthly principal and interest payments.
When should you refinance?
Your lender should be willing to discuss rate-and-term refinancing (where you’re lowering your rate or changing your loan term) with you at any point in time, although they will sometimes discourage it before six months. That’s because they can lose the money they made originating the loan in the first place if you refinance too soon. However, you should feel comfortable pushing back if you encounter this resistance from your lender. Cash-out refinances, where you tap your equity, typically require your current loan to be at least 12 months old.
In general, you should refinance when your expected benefit outweighs your closing costs. For example, if you know refinancing to get a lower interest rate will save you $200 a month and your closing costs will be $10,000, then it will take 50 months, or a little over four years, for you to hit your break-even point ($10,000/$200=50). If you think you’ll be in your home at least that long, then refinancing could make sense. But if you’re planning to sell your home in a year or two, that calculation tells you that refinancing probably isn’t the right move because you won’t benefit from the lower payments long enough to recoup what you spent on closing costs.
Get a mortgage rate~0.50% below the national average.
Wealthfront Home Lending offers:
Clear rates up front—get a quote in seconds with our rate calculator
No pushy sales calls
A simple process you can manage yourself in the Wealthfront app
