A recent survey commissioned by a lender revealed that 53% of its respondents prefer a 10% down payment on a home, not 15%, 20% or 30%. What’s more interesting is that 25% of the respondents professed not understanding how mortgage rates generally work.
This confusion is understandable because mortgages can be difficult subjects themselves. But in the interest of home buying and landing a good deal, understanding how mortgage rates work is important.
Let’s go over points that make mortgage rates the way they are. Let’s help you find a good mortgage deal too.
What Are Mortgage Rates?
These are interest rates charged on home loans. When you borrow to buy a home, your lender will charge a rate on the amount lent to you. The same goes when you refinance an existing mortgage debt as you will start a new loan.
Types of Mortgage Rates
In a broader context, mortgage rates can be high or low depending on market forces and monetary policies, e.g. Federal Reserve’s rate hikes. But your contract rate, the one on your mortgage note, will account the prevailing economic conditions plus the individual characteristics that make your loan.
Against this backdrop of changing rate environment, you can choose a fixed-rate mortgage to shield you from any rate disruptions or a variable-rate one.
Fixed-rate mortgages offer stability and no guesswork as they have fixed, equal monthly loan payments (for as long as property taxes and homeowners insurance premiums remain the same).
Variable rates are lower than fixed rates and are ideal for people who want to pay lower payments. Just be careful of any rate reset and refinance, if possible.
There are hybrid mortgages like the 5/1 ARM where the first five years of the loan have a fixed rate and after the period expires, a variable rate thereafter.
ABCs of Mortgage Rates
These factors will likely pull down or increase your interest rate.
- Credit score. This is the main consideration of lenders when determining your rate and your qualification to get a mortgage in general. Credit scores themselves are made up of several elements, including but not limited to: (i) your payment history – how well you are paying your existing debts, (ii) your credit utilization rate – how well you are using credit available to you, (iii) your credit mix – what kind of debts you have, (iv) your length of credit history – how long you have been using credit, and (v) your newly opened accounts – what kind of debts you just applied for. All this data is found on your credit report.
- Down payment. It’s a matter of risk for the lender. A larger down payment will most likely earn you a lower rate as opposed to coming up with a minimal one. Say, 20% of the purchase price means a higher initial equity in the home versus 5%. When the down payment is large, the amount to be borrowed becomes lower, too. This reduces the risk further, thus a reduced rate.
- Loan term. There’s a difference between 15 years and 30 years when it comes to mortgage repayment. We are talking about lenders facing the risk of not being repaid. So the longer the term, the higher the risk and the rate.
- Loan type. Is your mortgage backed by a federal agency, e.g. VA, USDA or FHA? Is it conforming to Fannie Mae or Freddie Mac? Or is it a jumbo loan? Your mortgage program has an impact on the type of mortgage rate you’ll get as each has varying down payment requirements, loan pricing adjustments and so on.
- Home location. Mortgage rates vary from county to county. Buying a home in a rural area would have a different rate than in a bustling metropolis. Whichever the case, it’s always good to shop among lenders to have a good feel of prevailing rates.
It’s a worthy goal to keep interest rates in mind when shopping for mortgages. Other than macroeconomic factors, you can do so much from your end to keep your rate low such as saving for a down payment or rebuilding your credit.Click to See the Latest Mortgage Rates»