Understanding Mortgage Rates
Mortgage rates — the amount of money a lending agency charges you to borrow their money to finance the purchase of a home — can fluctuate wildly.
The higher your mortgage or interest rate, the more money you’re paying to the bank to loan you money. The interest you pay on your loan, of course, is money that is not going toward paying down the principal balance of your loan. It’s just going to the lender.
So that means you want a low mortgage rate. How do you get one? When you apply for a mortgage loan from a mortgage broker, the brokerage determines the interest rate they will offer you based on a number of factors, some of which you can control and others you cannot.
Out of Your Control
Let’s start with the factors you cannot control.
The base level of mortgage rates is set largely by market forces, and moves up and down daily based on rates of inflation, unemployment and other economic factors. These factors are at the whim of our economic system, and not something any of us can influence when we get ready to apply for a loan.
You may have heard about “the Fed” changing interest rates. While the Federal Reserve System — the central banking system of the United States — does not set mortgage rates, its actions have an impact on rates. Its governing board implements monetary policy by setting the federal funds rate — the interest rates banks are charged for loans of federal funds.
Within Your Control
Factors you can control when it comes to the interest rate offered to you by lenders include your credit score, the amount you are financing, the amount of your down payment, and the type and terms of loan you are applying for.
It’s important to keep your credit score as high as possible — above 740 — as this will greatly influence the mortgage rate offered to you by lenders. Maintain a high credit score by paying your bills on time and keeping balances low on credit cards. Also, don’t close unused credit cards and don’t apply for lots of credit cards, particularly as you’re getting close to applying for a mortgage loan.
An area often overlooked by homebuyers is the amount a lender charges the consumer in fees. The fee amount can vary wildly depending on which lender is chosen to provide financing. These costs are typically referred to as “lender, processing, or underwriting fees” along with many other smaller fees that may be negotiated away. It is a good idea to have an expert, such as your Realtor, examine all the fees charged to make sure you do not pay too much!
You can pay an up-front fee, known as mortgage points, to reduce your interest rate. One point is one percent of the loan you are taking, and one point generally reduces your interest rate by 0.125 percent. If you plan to hold on to the home for many years, buying points might make sense.
Fixed vs. Adjustable
A fixed interest rate is one you “lock in” when you are applying for your loan. The rate you lock is the rate you’ll pay for the entire duration of the loan.
An adjustable mortgage rate loan, on the other hand, is one where the interest rate you pay fluctuates as the market changes. If interest rates go up, so will your payment, and vice versa.
Seek Expert Help to Sort it All Out
Understanding mortgage rates can be complicated. Don’t hesitate to consult a financial advisor, mortgage broker, or real estate agent to help you figure out your options and make the best choice for you and your family.
Call Swanson Realty at 512-686-8596 to learn how we can help ensure you get the best mortgage rate!