May 3rd, 2019 7:43 AM by Jackie A. Graves, President
It can be intimidating to
talk about interest rates with lenders - it's a
little bit like driving toward an unknown destination.
So before you set out, you'll want some
guideposts in place, information to help you understand how lenders determine
interest rates and what steps you can take to secure the best rate possible.
Why? Because a lower rate, even dropping one-quarter
of a percentage point, could save you thousands over the life of your loan.
How Much Could You
Say you're buying for a home for $250,000 with a
30-year fixed-rate mortgage and plan to make a 20% ($50,000) down payment. With
an interest rate of 4%, your estimated monthly mortgage payment (excluding
property taxes and homeowners insurance) would be $955 and you'll pay $143,739
in interest over the life of the loan (30 years).
Using the same purchase price and down payment, but
with an interest rate to 4.25%, just a quarter of a percent higher, your
monthly mortgage payment would go up to $984, and over 30 years you'll pay
$154,197 in interest, over $10,000 more.
At 5%, one full percentage point higher than the first
scenario, your monthly mortgage payment would rise to $1,074 a month, and
you'll pay $186,512 in interest on the 30-year loan, over $42,000 more.
Those numbers show why it's important to compare
interest rates from several lenders and find the best fit for your needs.
Lenders set interest rates based on several factors –
some of which you can influence and others you can't.
The most important factor you have control over is
your credit score. Your credit score helps lenders determine your
credit-worthiness or, in other words, how likely you are to repay your debts.
Typically, the higher your credit score, the lower your interest rate.
If you don't know your credit score, which ranges from
300 to 850, find out. There are many resources that will provide you with your
credit score or report for free such as www.annualcreditreport.com.
If your credit score is on the low side, you can take steps
to improve it. You'll want to start this process long before
contacting mortgage lenders, because it can take some time to see a change in
your credit score depending on where you start and your end goal.
The good news for home shoppers is that interest rates
are often negotiable. In other words, you can ask lenders to match the rate
quoted by another lender. You should also work with your lender to understand
what you can do to lower your rate.
One option they may suggest is having you pay mortgage
points (also known as discount points) to lower your interest rate. Points are
fees paid directly to the lender at the close of your loan. One point costs 1
percent of your mortgage amount (or $1,000 for every $100,000). Essentially,
this allows you to pay some interest upfront in exchange for a lower interest
rate, and the cost may be tax-deductible. As a general rule of thumb, consider
paying points if you plan to own the home for a long time.
Visit My Home by
Freddie Mac® for more information on the homebuying process and be sure to
follow our Spring Homebuying
Table: Home purchase price:
$250,000, Down payment: 20%, Loan Type: 30-year fixed-rate
Monthly Payment (excludes taxes and insurance)
Total Interest Paid over 360 months
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