A low interest rate can make the difference of thousands of dollars over the lifetime of a loan. If you’re looking to buy a home or refinance an existing mortgage, you need to understand how interest rates affect your mortgage.
What Are Mortgage Interest Rates?
When you take out a mortgage, you have to pay the bank a percentage of the money borrowed in the form of interest rates. You might think this would be a cut and dry sort of thing, but in actuality interest rates vary considerably.
What Factors Affect Mortgage Interest Rates?
There are several factors that affect mortgage rates including:
- Changes to the Federal Reserve prime rate
- Health of the housing market
- Health of the banking industry
- Fluctuations in the supply and demand of home loans
- International and national economic changes
More Factors That Affect Mortgage Interest Rates
It’s one thing to find out what the lowest interest rates are that a lender is offering, but it’s another thing to find out what interest rates you actually qualify for. The following factors affect mortgage rates you may qualify for:
- Your credit score and history
- The type of property you are buying
- The type of mortgage you are committing to
- The lender itself
- Your income situation
- Your overall wealth/economic health
How Often do Interest Rates Change?
Interest rates fluctuate all the time, which is why your lender may urge you to lock in a rate while it’s low. Use this link to find out what today’s mortgage rates are.
What is the APR? How is the APR Related to Interest Rates?
You may have noticed there are two rates quoted for your mortgage-the note interest rate and the APR, or annual percentage rate. Your monthly mortgage payments will be determined by the note rate. The APR is the rate you will end up paying over the life length of the loan, assuming you stay in the house for the entire life of the loan (and don’t sell), make payments on time, and make only your monthly payments (nothing extra). It takes into account things like appraisal fees, prepaid charges, PMI (mortgage insurance), lender fees-everything you will pay over the life of the loan, again assuming you keep the loan for the entire length of the loan.
It may help you to understand what exactly makes up the APR, especially if your APR is much higher than the note rate. You’ll want to make your decision on the note rate, but ask for full disclosure of all closing costs and fees (including point options) as well.
What is on a Lender Rate Sheet?
Your lender will consult a lender rate sheet to determine what interest rate quotes to offer. The lender rate sheet details all the mortgage options, possible rates, adjustments to rates related to credit risk factors, and the “par rate”, which is the point at which the lender breaks even. The lender will charge you over the par rate to compensate for any risks identified. The loan officer will look at the lender rate sheet, factor in risks based on your credit history and financial situation, and then will add in charges to make sure he or she makes money off the deal. The end result is your final interest rate quote for a loan option.
Interest Rate Conclusion – Shopping For Interest Rates
It can be difficult to compare interest rates, especially since rates change daily and different types of loans will charge different interest rates. Make sure you do the following when comparing mortgages:
1. Gather your mortgage interest rate quotes on the same day
You have to do this because rates change often, sometimes more than once in a day. Use internet services to gather a lot of quotes quickly. Once you get a few quotes, research the lenders for stability, reliability, and mortgage options. Choose the top three lenders and investigate options from all three in depth.
2. Compare apples to apples
That means you need to make sure the options are similar types of mortgages. For example, an ARM (adjustable rate mortgage) may have a great initial rate, but it may be a terrible deal when the rate balloons later on. The ARM may look like a better deal when compared to the traditional FRM (fixed rate mortgage), but the FRM may be better for you over the life of the loan.
3. Watch out for false advertising
Some lenders will advertise one rate, but you’ll find out you don’t qualify for a loan at that rate once you apply. They may be advertising their very best rate which is only given out to clients with top-notch credit or who already have a loan with them. You need to get a quote that applies to you.
4. Don’t sign anything until you’re sure you’re getting the best deal possible
Compare different mortgage options to determine which one will get you the best interest rate and the best overall arrangement for your situation. Interest rates are not the only important factors to consider when committing to a loan.