Understanding Mortgage Interest Rates
If you’ve ever had a credit card or an auto loan, surprise: you’ve had an interest rate! It’s the percentage the credit card company or bank charges you every month as long as you owe money on your loan balance.
How does this work with buying a home? Your mortgage interest rate plays an important role in how much money you spend over time. Let’s find out exactly what interest rates are and why they’re so important.
What is the Interest Rate When Buying A Home?
When you borrow money to buy a home (known as a mortgage), lenders charge interest on the loan as the price of lending you money. This is called a mortgage interest rate, and it’s the primary factor that affects how much you’ll pay over your loan, along with the principal, loan balance, and overall terms of your mortgage.
The reason home buyers talk so much about their interest rate is that even a slight increase or decrease can drastically change their monthly payment, saving (or costing) them thousands of dollars in interest over time. Understanding how interest rates affect your loan will give you a solid foundation for when you purchase your own home and help you decide which loan is best for you.
How Do Lenders Decide Your Mortgage Interest Rate?
There are lots of factors that mortgage lenders consider when deciding what rates to offer you:
- Your credit score. Lenders look at this because it gives them a picture of how likely you are to repay your loan on time. The higher your score, the less risk you are, so they feel comfortable giving you a lower rate.
- The size of your down payment. While lending guidelines allow you to put down as little as 3.5%, the more you’re putting down on your house, the less risk you are to lenders — again, getting you a lower rate.
- The amount of the loan/closing costs. Some borrowers “roll in” their closing costs into their loan, making the loan amount larger. However, doing this also can result in a higher interest rate.
- What type of mortgage/loan you have. Shorter loans (say, 15 years instead of 30) may get you lower interest rates, as well as adjustable-rate mortgages. However, adjustable-rate loans often reset, so your interest rate will fluctuate with the market.
APR: More Than Just Interest
APR stands for Annual Percentage Rate. This differs from a mortgage interest rate because it includes additional borrowing costs like broker fees, discount points, PMI (Private Mortgage Insurance), and closing costs. Because of this, APR is a truer picture of your borrowing costs — and also usually higher than your mortgage interest rate.
A Local Mortgage Broker Can Help You Find the Right Loan Option
Now that you know what a mortgage interest rate is and why lenders offer certain rates, your next step is to contact an independent mortgage broker. Independent mortgage brokers have access to wholesale interest rates, which often means a lower monthly payment and more money in your pocket. They’ll work with a carefully chosen group of lenders to find interest rates that fit your needs — and continue to help you throughout the home loan process.
Ready to get started? Search for a local mortgage broker near you.