Current mortgage interest rates are always a hot topic for homebuyers or those who are curious about the affordability of homeownership. Knowing the general market rate can be helpful when budgeting for an eventual purchase. But when you eventually sit down with your lender, the quoted rate might be very different. To understand why, you need to know what an interest rate is and what factors affect your individual rate – factors within your control and those beyond your influence.
What Is A Mortgage Interest Rate?
Your interest is a percentage of your mortgage’s principal amount – the amount loaned – which you pay as part of your monthly mortgage payment. It is essentially your lender’s compensation for providing the funds to purchase your property.
Interest, however, is only one part of what will make up your monthly mortgage payments. Payments are comprised of your PITI: principal, interest, property taxes and insurance.
What You Can Do To Improve Your Rate?
You may be surprised by how much your mortgage rate is within your control. One crucial factor is your credit score. In general, the higher your credit score, the lower your interest rates. This is because your credit score tells lenders how reliable you may be in paying back the money loaned to you. The lower your score, the riskier you may seem as a borrower, and the higher your rate will be to offset that risk.
If you have less-than-perfect credit, there are ways to boost your score, but understand that it may take time for your actions to reflect in a better number.
Your down payment is another factor in determining your mortgage insurance rate. Similar to your credit score, a larger down payment indicates a lower risk for your lender as you’ll be sharing more of the debt burden.
How much this may change your rate depends on the specifics of your home purchase, so be sure to discuss this with your Mortgage Loan Originator. However, as a rule of thumb, if you are comfortable putting down more than the minimum down payment, it could help you in the long run.
The rate type you choose – whether fixed or adjustable – also directly impacts your interest. An adjustable-rate mortgage (ARM) generally offers lower interest rates. That lower rate stays locked in for a pre-determined amount of time, after which it will change to reflect the rates of the current market.
The benefits of using an ARM are that your initial rate is low, and you can refinance at any time without penalty. Many do just that by waiting for rates to hit the bottom of a cycle and then refinancing into a fixed-rate mortgage. The average life of a 30-year mortgage is seven years, so a seven, 10 or 15-year ARM can help you save on interest without much risk.
Factors You Can’t Control That Affect Your Rate
Although most of the influences on your mortgage interest rate are determined by you to some degree, many are beyond your to control.
Seller contributions are an example and happen if your seller is able to contribute money towards the closing of your home. This additional cash can allow you to place a larger down payment, thereby lowering your interest rate.
The most important element at play when it comes to your interest is entirely out of your hands. That’s the state of the economy. If the stock market falters, if unemployment increases or if there is a dip in foreign markets, the rate will rise across the board.
To know why this is the case, it’s important to understand that mortgages are bought and sold on the market to investors as Mortgage Backed Securities or MBS. When the economy is in decline, investor demands for a higher return force interest rates to rise.
Getting The Right Mortgage Interest Rate For You
There are a number of ways for you to directly or indirectly lower your mortgage interest rate. Contact one of our Mortgage Loan Originators to create a loan program that will work for you and your long-term goals.