5 Things to Know About Mortgage Interest Rates
When people start their search for a home, one of the first things they need to consider is a mortgage. The interest rate they can get for the mortgage can have dramatic effects for the home purchase, including what buyers are able to get and the size of their monthly payments. Understanding the ways interest rates play a role can help people determine when is the best time to buy a home. Here are five areas Anaheim home buyers should become familiar with before they settle on a mortgage.
1. Mortgage Interest Rate Fluctuations
Mortgage interest rates go up and down by the week. Within a three-month period, the average rate might rise or fall by a quarter of a percent. In the space of a year, interest rates may change by a percentage point or more. The rate people secure in a loan is based on several factors, like the type of loan they get and their creditworthiness. However, it is dictated most by current trends. It is important to keep an eye on interest rates when people are thinking about buying a home, but also afterward. Home buyers who see rates trending upward may want to consider buying sooner, before the rates climb too much higher.
2. Interest Rates and the Monthly Payment
The reason home buyers should be concerned about interest rates is because it presents one of the biggest effects on the monthly payment. When people get a mortgage, it usually includes the following components:
- principal paid down on the mortgage
- interest on the loan
- property taxes
- homeowners insurance and/or private mortgage insurance (PMI)
For the first few years in particular, the interest is the largest portion. The higher the interest rate, the more people have to pay in interest for the loan. Although interest rates may seem to fluctuate only a little from week to week, a slight difference may make a notable change in the payment. Even a rise or drop of a quarter of a percentage point may represent hundreds of dollars per month, depending on the size of the loan.
3. Interest Rates Based on Loan Type
When people shop for loans, they should keep in mind the loan type affects the average interest rate. The standard mortgage loan is a 30-year fixed-rate loan, but there are other kinds homeowners can consider. Interest rates are typically set based on the risk presented by the loan. Higher risk translates into a higher rate. This is why a 15-year fixed-rate loan tends to have a lower rate than a term of 30 years. It also explains the higher average rates for a jumbo loan, which requires more money than conventional loan financing. Adjustable-rate mortgages usually start with a rate lower than fixed-rate loans, largely because they can adjust upward after the initial term. ARMs are often popular among people with a limited credit profile, so the higher rate over time accounts for an increase in the lender's risk.
4. Home Buying Power
Since the amount of money buyers can get in a mortgage is set by the monthly payment, the interest rate can significantly affect how much they can buy. When lenders prepare a Loan Estimate, they take the borrowers' income and debts and generate a maximum monthly payment. A higher interest rate translates into more money paid in interest, so it decreases the total amount of the loan someone can secure. In areas with a competitive real estate market or a high cost of living, this can determine whether or not someone qualifies to buy property at all. This underscores the importance of buyers knowing how much they are likely to get in relation to interest rate before they start shopping. Advance preparation helps ensure they can follow through with financing on a purchase offer.
5. Shopping Around
Home buyers should remember interest rates are based on current trends and their application, but also the lender. One lender might offer different terms with a higher or lower interest rate than another. Some lenders have access to loan programs, which make it easier for borrowers to qualify or secure lower interest rates. Buyers should plan to apply for a mortgage with more than one lender. They can ask about loan types and whether or not they can lock in the interest rate, which is important if rates are going up. This makes it easier to compare terms and select the one most likely to meet their needs.
Buying a home starts with determining what a home buyer can afford. The mortgage interest rate plays a large part in this decision. Buyers can better ensure a good result by researching loan types, shopping around, and applying when interest rates are low.