What Affects Mortgage Interest Rates When Buying a Home?
Once people decide they'd like to buy a home, they want to know what interest rate they can expect from a mortgage. After all, buying a home is an important decision and the interest rate is a big factor that determines what the payments will be.
It's a good idea to understand what affects mortgage interest rates. That way you can do your best to secure the best interest rate for your home purchase. So, to help you out, here's a list of things that affect mortgage interest rates.
Credit Score
It's no surprise that your credit score affects the interest rate of your mortgage. Generally speaking, when a person applies for a loan the lender will check their credit score. For lenders, credit scores are historically a tool they use when evaluating loan application.
You should do your homework before buying a home. It can be very helpful to get a credit report before you purchase a home. You can see where you stand with your credit report, check out if there is anything you can improve, or fix any errors.
Down Payment
How does a down payment affect mortgage interest rates? When a borrower makes a commitment to a down payment, it may be seen as a lower risk to the lender. That could mean a higher down payment resulting in a lower interest rate.
The Type of Loan
There are a variety of loans and mortgages for people to choose. Depending on what loan you go with, the interest rate will differ. There are conventional loans, FHA loans, and others. Just like doing your homework with credit reports, you should consider the different kinds of loans and what kinds of interest rates they offer.
Loan Term
The term of the mortgage can also affect the interest rate. It makes sense. The length of time that you will be paying the loan matters to the borrower. The rule of thumb is that the shorter the term of the loan, the lower the interest rate. However, even with a lower interest rate, paying the same amount of money over a shorter period usually means higher monthly payments. It's important to consider this when deciding what kind of mortgage is right for you.
The Type of Interest Rate
Just like there being different kinds of loans, there are different types of interest rates. The type of interest will affect the interest rate. There are fixed rate mortgages and adjustable rate mortgages. As you might guess, fixed rates do not change for the length of the mortgage. Adjustable rates have a set interest rate for a given time period, then the rate can adjust based on the market. Here's how it affects interest rates. An adjustable rate mortgage may offer you a lower interest rate, but when the time period begins where the rate can change you may end up with a higher rate based on market factors.
Economic Factors
Mortgage interest rates are dependent on several factors in the economy. Some of these factors are economic growth, inflation, monetary policy, and housing market conditions. While these things are a little beyond your control as an individual, they are a reality. Understanding that these economic factors can raise or lower interest rates can help you make informed decisions.
What You Need to Know
Interest rates are certainly an important part of buying a home. Make sure you are taking time to arm yourself with as much information as you can to understand what can affect your interest rate positively and negatively. In addition, know how the various factors affect your loan and your home purchase, in general. If you have more questions or are unsure about how to find the right interest rate for you, you can check out the links below or connect with a credit union representative or mortgage expert.
Useful Mortgage Resources:
- Mortgage rates – Browse mortgage rates for various mortgage products.
- Loan and Savings Calculators – Crunch the numbers. How much home can you afford? What should your down payment be?
- Mortgage Products – Browse mortgage products.
- Mortgage Application - Are you ready for the next step? Apply for a mortgage.
