Buying a house is quite a big deal for most of us. Most buyers can’t put up enough money to purchase a house upfront. Therefore they rely on a mortgage which they can pay off over a period of time. This process significantly reduces the upfront payment that a buyer has to make, but increases the overall amount. Thus, while buying a house you wouldn’t want to hurry to make any decisions. It is a good practice to search around not just for the house, but your mortgage options as well.
We all can agree on the fact that the most important factor in determining the price of a mortgage is the interest rate on your mortgage. Typically, you would want to get the lowest interest rate on your mortgage. But what really determines the interest rate? That is a little tricky to find out even for the smartest of the borrowers.
Knowing what factors govern the interest rate on your mortgage will really help you in getting the lowest interest rates. So here is a breakdown for you to know more about the interest rate and how to determine what amount of interest rate you would be paying for the mortgage of your dream house.
The amount of money that you borrow from your lender to pay for your house is called the principal. There is also an additional amount that you have to pay to your lender called interest rate for borrowing the money. This interest rate is a percentage (typically from 4-5 %) of the principal that you have left to pay. Small amounts of this interest rate are added to your monthly mortgage payment. Since this interest rate determines the overall price you have to pay for your house, you must pay special attention to it before making a decision. Saving even a fraction of the percentage of the interest rate will save you thousands of dollars by the end of your mortgage term.
The interest rate on the mortgage fluctuates just like the prices of automobiles or gasoline. So, it is a good practice to study past trends and figure out what time would be best for you to apply for a home loan. This technique will surely make you more informed about the whole procedure and will allow you to have a good conversation with your lender helping you understand your mortgage choices.
1. Down Payment
A down payment is the money you pay upfront for the house. Usually, a larger down payment means a lower interest rate. Often when the buyers put 20% or more upfront payment, they will get a lower interest rate than the buyers who are able to put only a 10-15% upfront payment.
This is because when you pay more money as the down payment for your house, it increases the mortgage lender’s trust in you that you will be able to pay the rest of the money as well. It decreases the risk for lenders. Hence people who put up more upfront payment are rewarded with lower interest rates.
2. Credit Score
Lenders will take a look at your credit score to know if they can trust you to let you borrow their money. Generally, buyers with higher credit scores get lower interest rates than the ones who have a lower credit score. Lenders use your credit score information to determine how reliable you will be in paying your monthly mortgage payments.
Credit scores are calculated by the information on your credit history including the loans you took, credit card usage and payment history. Whenever you take out a loan, open a financial account or buy real estate, your credit score is affected.
Your ability to pay back your mortgage affects your overall credit score, so it is very important to find a mortgage plan that you can afford.
3. Home Price and Location
One of the factors that affect your mortgage loans is the price of the home you are buying. The interest rate is higher for the house payments that are particularly larger or smaller.
The amount that you need to borrow for your house includes the home price, plus the closing costs, minus the down payment. So, a larger house payment typically results in a greater interest rate.
The house location and the state you live in also affects your home mortgage. If you want to get the accurate results of the interest rate for a particular location, get in touch with one of our lending experts to know more.
4. Loan Amount
Homebuyers usually have to pay higher interest rates on loan amounts that are particularly small or large. Large loan amounts bring more risk to the lenders, which is why some lenders demand a higher interest rate for them.
Depending on your loan type and financial circumstances, mortgage insurance and closing costs may also be included in your home loan. This will result in a higher overall mortgage price over the years.
5. Loan Term
Another factor that determines your total interest paid to your lender is the loan duration. The term, or duration, of your loan is the time in which you completely pay your mortgage. Generally, short-term loans have lower interest rates as compared to long-term loans.
If you are taking a 30-year fixed rate mortgage plan, then your loan will have lower monthly mortgage installment payments. But it results in a greater overall interest paid to your lender. A 15 or 10 year fixed rate mortgage will ask for higher monthly payments but reduces the interest rate paid.
Adjustable-rate loans may also increase the interest rate over time as the market rate fluctuates. So, it is advised to have a deeper look at these different loan payment options and choose the one that best fits your situation.
6. Discount Points
If you want to lower the interest rate on a mortgage, you can add discount points to your loan. This paying for the discount points is typically referred as “Buying Down the Rate”. This allows you to pay your lender some extra money at the time of closing in exchange for a lower interest rate.
One discount point is equal to 1% of the loan. The amount of interest rate that is reduced by a discount point vary from lender to lender. Moreover, paying for a discount point does not always mean that you have to pay for exactly 1% of the loan. You can pay half a point (0.5% of the loan) as well depending on you budget.
7. Annual Percentage Rate (APR)
APR is an important aspect to consider when finalizing your mortgage plan. It consists of both the mortgage lender controlled costs and third-party costs. It reflects the overall cost of the interest rate, processing costs, lenders fee, documentation costs, origination charges, and discount points.
Understanding all these factors associated with your mortgage is important. It is also important that you compare the loan interest rate and overall plan from different lenders and choose the one that best fits your resources. APR is the best way to compare the costs of loans from different lenders as it accurately reflects the total cost of your mortgage loan.
If you want to discuss the factors in detail you can contact us at Affiliated Mortgage. We are rated as the best provider of home loans in Rapid city, SD, top amongst mortgage lenders in Sioux Falls, SD and mortgage companies in Fargo.
There are a number of ways that you can try to get a better interest rate from your mortgage lender. Some of the important ones are:
Pay a higher down payment:
This is the most effective way to get lower interest rate on your mortgage. Try to save money for some time and then apply for a mortgage, it will definitely reduce your overall cost for the house.
Compare the different options:
It is always a good idea to explore your options while buying a house. Compare different lenders and their mortgage plans.
Improve your credit score:
Try to gain the trust of your lender by improving your credit score. Don’t max out your credit card limit, pay your debts and bills. It will definitely help you to get a lower interest rate from your lender.
Keep an eye on the economy:
Wait for the interest rates to go down in your area. Observe the past trends and make an informed decision.
The biggest factor that determine the price of your mortgage ultimately comes down to your personal situation. However, understanding what affects the mortgage rates you are offered can help you significantly. Improving your credit score, paying more down payment, and finding a good mortgage lender can help you get the best mortgage deal which fits your needs and financial situation.
Affiliated Mortgage has helped thousands of Americans with the home loan process over the years. The Mortgage Experts at Affiliated Mortgage put extra efforts to get the best mortgage rates and terms for its clients. Contact us now to know the latest mortgage rates.