Mortgage interest rates are a mystery to many potential home buyers, whether you need a home loan for your first house or your fourth.
What is an interest rate? Why do mortgage rates swing up and down? Most importantly, how do you get the best interest rate that is going to save you the most money over the life of your mortgage?
Here is an outline what you need to know about interest rates before applying for a mortgage.
Why does your interest rate matter?
Mortgage lenders don’t just loan you money because they’re good guys—they’re there to make a profit. “Interest” is the extra fee you pay your lender for loaning you the cash you need to buy a home.
Your mortgage interest payment is calculated as a percentage of your total loan amount. For instance, you obtain a thirty year, two hundred thousand dollar loan with a four percent interest rate. Over thirty years, you would end up paying back not only that two hundred thousand dollars, but an extra one hundred forty-three thousand seven hundred thirty-nine dollars in interest. Your mortgage payments would amount to about nine hundred fifty-five dollars each month. But your mortgage payments will end up higher or lower depending on the interest rate you get.
Why do interest rates go up and down?
Mortgage rates can change daily depending on how the United States economy is performing. Reports on employment, consumer confidence, fluctuations in house sales, and other economic factors will influence interest rates.
How do you lock in a mortgage interest rate?
A rate lock is a commitment by a mortgage lender to give you a home loan at a specific interest rate – usually thirty days from when you are preapproved for your loan.
A rate lock offers security against fluctuating interest rates. This is useful considering that even a quarter of a percentage point can take a huge chunk out of your housing budget over time. A rate lock offers borrowers peace of mind. No matter how wildly interest rates change, once you are locked in, you know what monthly mortgage payments you will need to make on your home, enabling you to plan your long-term finances.
Many home buyers naturally obsess over the best time to lock in a mortgage interest rate. They are worried that they will pull the trigger right before rates sink even lower.
But lenders don’t have a crystal ball that shows where mortgage rates are going. It is impossible to know exactly where the economy will move in the future. You should get caught up with minor ups and downs. A larger question to consider when locking in your interest rate is where you are in the process of finding a home.
Click here to learn what to expect when buying a home in the spring!
How do you get the best interest rate?
Mortgage rates vary depending on a buyer’s personal finances. These six key factors will affect the rate you can qualify for:
You credit score: When you apply for a loan to buy a home, your lender wants some reassurance you will repay them later. A way they assess this is by scrutinizing your credit score. This is the numerical representation of your track record of paying off your debts, from college loans to credit cards. Mortgage lenders use your credit score to predict how reliable you will be in paying your home loan. A fair score ranges from 650 to 699, a good score is 700 to 759, and a perfect credit score is 850. Borrowers with generally higher credit scores receive lower interest rates than borrowers with lower credit scores.
Down payment and loan amount: If you are willing and able to make a large down payment on a house, mortgage lenders assume less risk and will offer you a better rate. If you do not have enough money to put down twenty percent on your mortgage, you will probably have to pay private mortgage insurance. This is an extra monthly fee meant to mitigate the risk to the lender that you might default on your loan. PMI ranges from about zero point three percent to one point one five percent of your home loan.
Home loan type: Your interest rate will depend on what type of loan you choose. The most common type of mortgage is a conventional mortgage. This is aimed at borrowers who have solid assets, well-established credit and steady income. If your finances are not in great shape, you might be able to qualify for a Federal Housing Administration loan. This loan is government-backed and requires a low down payment of three and a half percent. There are also United States Department of Veterans Affairs loans is available to active or retired military personnel, and the United States Department of Agriculture Rural Development loans are available to Americans with low to moderate incomes who want to buy a house in a rural area.
Mortgage loan term: A shorter-term loan usually has lower interest rates, lower overall costs, and larger monthly payments.
Type of mortgage interest rate: Interest rates depend on whether you get an adjustable-rate mortgage or a fixed-rate mortgage. An adjustable-rate mortgage is a loan that starts out at a predetermined interest rate. The rate adjusts after a specified initial period of three to ten years based on market indexes. A fixed-rate mortgage means the interest rate you pay remains fixed at the same level throughout the life of your loan.
Do you have a question about mortgage interest rates? Call 949-632-6400 to contact the Reed Team today!