April 14th, 2019 9:44 AM by Jackie A. Graves, President
interest rates are a mystery to many of us—whether you're a home buyer in need
of a home loan for your first house or your fifth.
what does “interest rate” even mean? Why do rates swing up and down? And, most
important, how do you nab the best interest rate—the one that’s going to save
you the most money over the life of your mortgage?
outline what you need to know about interest rates before applying for a
lenders don't just loan you money because they’re good guys—they’re there to
make a profit. “Interest” is the extra fee you pay your lender for loaning you
the cash you need to buy a home.
payment is calculated as a percentage of your total loan amount. For example,
let’s say you get a 30-year, $200,000 loan with a 4% interest rate. Over 30
years, you would end up paying back not only that $200,000, but an extra
$143,739 in interest. Month to month, your mortgage payments would amount to
about $955. However, your mortgage payments will end up higher or lower
depending on the interest rate you get.
rates can change daily depending on how the U.S. economy is performing, says Jack
Guttentag, author of “The Mortgage Encyclopedia.”
confidence, reports on employment, fluctuations in home sales (i.e., the law of
supply and demand), and other economic factors all influence interest rates.
period of slack economic activity, [the Federal Reserve] will provide more
funding and interest rates will go down,” Guttentag explains. Conversely, “when
the economy heats up and there’s a fear of inflation, [the Fed] will restrict
funding and interest rates will go up.”
A “rate lock” is a commitment by a lender to give you a home loan
at a specific interest rate, provided you close on your home in a certain
period of time—typically 30 days from when you're pre-approved for your loan.
A rate lock
offers protection against fluctuating interest rates—useful considering that
even a quarter of a percentage point can take a huge bite out of your housing
budget over time. A rate lock offers borrowers peace of mind: No matter how
wildly interest rates fluctuate, once you're "locked in" you know
what monthly mortgage payments you'll need to make on your home, enabling you
to plan your long-term finances.
many home buyers obsess over the best time to lock in a mortgage rate, worried that they'll
pull the trigger right before rates sink even lower.
no lender has a crystal ball that shows where mortgage rates are going. It’s
impossible to predict exactly where the economy will move in the future. So,
don't get too caught up with minor ups and downs. A bigger question to consider
when locking in your interest rate is where you are in the process of finding a
experts suggest locking in a rate once you're "under contract" on a
home—meaning you've made an offer that's been accepted. Most lenders will offer
a 30-day rate lock at no charge to you—and many will extend rate locks to 45
days as a courtesy to keep your business.
offer rate locks with a “float-down option,” which allows you to get a lower interest
rate if rates go down. However, the terms, conditions, and costs of this option
vary from lender to lender.
rates vary depending on a borrower’s personal finances. Specifically, these six
key factors will affect the rate you qualify for:
score: When you apply for a mortgage to buy a
home, lenders want some reassurance you’ll repay them later! One way they
assess this is by scrutinizing your credit score—the numerical representation of your track record
of paying off your debts, from credit cards to college loans. Lenders use your
credit score to predict how reliable you’ll be in paying your home loan, says Bill
Hardekopf, a credit expert at LowCards.com. A perfect credit
score is 850, a good score is from 700 to 759, and a fair score is from 650 to
699. Generally, borrowers with higher credit scores receive lower interest
rates than borrowers with lower credit scores.
amount and down payment: If you're willing and
able to make a large down payment on a home, lenders assume less risk and will
offer you a better rate. If you don’t have enough money to put down 20% on your
mortgage, you’ll probably have to pay private mortgage
insurance, or PMI, an extra monthly fee meant to mitigate the risk
to the lender that you might default on your loan. PMI ranges from about 0.3%
to 1.15% of your home loan.
location: The strength of your local
housing market can drive interest rates up, or down.
type: Your rate will depend on what type of loan you choose. The most common type is a
conventional mortgage, aimed at borrowers who have well-established credit,
solid assets, and steady income. If your finances aren't in great shape, you
may be able to qualify for a Federal Housing Administration loan, a government-backed loan
that requires a low down payment of 3.5%. There are also U.S. Department
of Veterans Affairs loans, available to active or retired
military personnel, and U.S. Department
of Agriculture Rural Development loans, available to Americans with
low to moderate incomes who want to buy a home in a rural area.
term: Typically, shorter-term loans have lower
interest rates—and lower overall costs—but they also have larger monthly
of interest rate: Rates depend on whether you get
a fixed-rate mortgage or an adjustable-rate mortgage, or ARM.
"Fixed-rate" means the interest rate you pay remains fixed at the
same level throughout the life of your loan. An ARM is a loan that starts out
at a fixed, predetermined interest rate, but the rate adjusts after a specified
initial period (usually three, five, seven, or 10 years) based on market
you're looking to buy a home or a homeowner looking to refinance, there are
many mortgage tools online to help, including the following:
A mortgage rate trends tracker lets you follow interest
rate changes in your local market.
A mortgage payment calculator shows an estimate of your
mortgage payment based on current mortgage rates and local real estate taxes.
Realtor.com's mortgage center, which will help you find a lender who can offer
competitive interests rates and help you get pre-approved for a mortgage.
smart financial news and advice, head over to MarketWatch.
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