You may already be aware, as a house buyer, that the interest you pay on a mortgage depends on the rate you lock in and the length of your loan. But do you understand the full implications of your mortgage rate? Discover the ins and outs of mortgage rates and how you can use this knowledge to your financial advantage now and in the future.
What is your mortgage rate?
Among the expenses associated with obtaining financing from a financial institution is the interest rate (sometimes known as a mortgage rate). Interest on a mortgage loan is typically included in the monthly payment rather than being paid in a separate payment to the lender.
What’s the difference between a mortgage rate and APR?
The APR is calculated using several factors, one of which is your mortgage rate (APR). This is why the interest rate you pay on your mortgage is often lower than the APR you pay.
Your mortgage interest rate is the real rate used to compute your monthly principal and interest payment, and it only applies to the cost of borrowing a set amount of money from a lender. The annual percentage rate (APR) takes into account a wider range of mortgage expenses, such as:
Discounted fees for brokers
An approximate fraction of your total closing expenses.
You should inquire with your lender about what factors into your APR and how the terms of your loan affect the total cost when comparing APRs.
Types of mortgage rates
With a fixed-rate mortgage, your interest rate remains the same throughout the loan’s duration. You can count on the same amount each month to cover both the principal and interest on your loan. The interest rate on a fixed-rate mortgage is often greater than the rate on an adjustable-rate mortgage at the same point in time.
Adjustable-rate mortgage (ARM)
The interest rate on an adjustable-rate mortgage (ARM) typically remains the same for the first few years of the loan but is subject to fluctuate after that (often after the first five or seven years). It’s possible that once your trial term is complete, your P&I premium will skyrocket. Caps on interest rates are in place to prevent excessive rate hikes.
Factors that affect mortgage rates
You and your specific financial and economic condition will both play a role in determining your mortgage interest rate. Whether or not you qualify for a reduced rate depends on your individual financial circumstances. These elements may impact your mortgage rate.
External economic factors
These external factors are out of your hands, but they do affect how much the national average mortgage rate varies.
The robustness of the economy. As the economy improves, more people will be able to afford to buy a house. Mortgage rates rise in response to rising demand because lenders have a finite amount of capital to distribute.
Rates of employment. Mortgage interest rates tend to go down when the unemployment rate rises. Mortgage rates rise when the labor market improves to keep up with demand.
Status of the housing market. In a market where fewer homes are being constructed, mortgage rates tend to fall as a result of reduced demand. The demand for mortgages can be reduced, and interest rates lowered if more people opt to rent instead than buy.
Exchanges for stocks and bonds. Mortgage rates tend to fall as the stock market declines.
Fed Treasury reserve. The Federal Reserve is responsible for managing the economy and promoting economic growth and stability across the country. The Fed does not directly control mortgage rates, but they tend to follow the ups and downs of federal fund rates.
Rates of inflation. When prices rise due to inflation, it becomes more difficult for creditors to recoup their initial investments. Inflation is generally reflected in higher mortgage rates.
Personal financial factors
The mortgage interest rate you’re offered will depend heavily on your individual financial position. You may be able to receive a mortgage rate that is more manageable if you take these steps.
Financial leverage. Lenders can see how much of your money is going toward paying bills with your debt-to-income ratio. Your mortgage interest rate will be higher to compensate the lender for the greater risk involved in providing you with a loan if your debt-to-income ratio is high.
Credentials background. Banks and other financial institutions can extrapolate your future financial behavior based on the choices you’ve made in the past. If your credit score is high, you show that you are a responsible debtor to lenders, who are more likely to grant you a loan at a favorable interest rate.
Measures of the Loan’s Size, Type, and Tenure. Different mortgage rates might differ significantly depending on factors such as the loan’s term and interest type (fixed vs. adjustable).
The sum to be put down as a down payment. A smaller mortgage balance results from a larger down payment. A lower total loan amount and greater equity in the home result from a larger down payment.
How to lower, change or lock-in your mortgage rate
Although you may not be able to influence the factors that ultimately set your rate, you may still shop around for a mortgage that fits within your budget.
How to get a lower mortgage rate
A home loan’s interest rate is a major factor in its affordability. The first step toward a better mortgage rate is buying a property. Lenders will see that you are a reliable borrower if you work to establish a strong credit history and practice sound money management. Look around at several mortgage loan providers to find the best rates and terms for your situation. Consider these as you negotiate terms with your lender to reduce your interest rate.
Prepare a sizable down payment by saving up. Putting down a larger sum of money on a home means financing a smaller portion of the entire price, which can help you avoid PMI.
Get mortgage points for a discount. The interest on your mortgage can be paid ahead of schedule in this method. You can lower your interest rate by a small amount by paying mortgage points, which are a proportion of the loan’s total cost.
Please consult a Home Loan Specialist. Discuss your budget and how your loan type and term characteristics can help you secure a lower interest rate on your mortgage.
How to lock in your mortgage rate
Mortgage interest rates are susceptible to fluctuation on a regular basis due to the volatility of the market. Locking in a mortgage rate is a good idea if and when you are offered a rate that suits your needs. Even if interest rates increase between the time of your quote and the time of closing, you will still receive the rate you were quoted.
The average length of a rate lock is between 30 and 90 days, and the associated cost varies. Even though rate locks keep your mortgage rate from increasing, they may prevent you from saving money if rates drop. Discuss your lock choices with your Home Lending Advisor.
How to change your existing mortgage rate
You may be able to refinance your mortgage to a lower interest rate if you are having trouble making your monthly payments or if you just want to take advantage of the current market conditions. It’s also worth noting that selecting one of these alternatives could affect other aspects of your mortgage.
Refinancing: In most cases, borrowers can lower their interest rate by refinancing their loans. You are exchanging your current loan for a new one when you refinance. If you qualify, you may be able to lower your monthly payments and even your total cost of borrowing.
Loan modification: Mortgage refinancing allows borrowers to refinance their existing mortgage into a new loan with more favorable conditions.
When calculating your monthly mortgage payment and the overall amount you pay for your house, your mortgage rate is just one of several elements to consider. If you invest some effort into learning about mortgage rates and their history of changes, you may be able to negotiate a more favorable interest rate. Find the best mortgage rate for your situation by consulting a Home Lending Advisor.
Article source: www.investopedia.com/terms/m/mortgage-rate.asp