Here's how to get a better mortgage rate
Here’s how to get a better mortgage rate
Anúncios

Are you in the market for a new home? If so, you may also be looking for the best mortgage rates. How can you be sure you’re getting the best deal? By understanding what a mortgage rate is and how it’s determined, you can figure out how to get the best rate.

The mortgage rate is the rate you pay the mortgage lender, and it determines how much you ultimately pay for the property. The higher the interest, the more you pay overall. Mortgage rates are calculated by lenders based on current economic conditions (out of your control) and personal factors such as credit history, occupancy, loan amount, down payment, etc. We’ll break down the different types of mortgage rates you might choose from and the steps you can take to get the best rate possible.

Different Types of Mortgage Rates

Most of the time, when buying a mortgage, you’ll be choosing between a fixed-rate mortgage and an adjustable-rate mortgage. With a fixed-rate mortgage, you pay a fixed monthly rate until the loan is repaid. Fixed rate mortgages offer higher interest rates right from the start, but you enjoy security and stability.

Adjustable-rate mortgage rates change during the repayment period. You pay low interest rates initially for the first seven or ten years, and depending on the state of the economy, interest rates rise over time. Adjustable-rate mortgages have lower introductory rates, but the amount increases over time, which can put you in a bind if you don’t have a source of income to accommodate rising interest rates.

Mortgage rates: How are they set?

Mortgage rates are set based on market factors (such as federal interest rates) and personal factors (such as your credit rating). Lenders use these factors to assess the risk level of the loan, or in other words, the likelihood that you will not be able to repay the money they lent you. This rating determines the mortgage rate they offer you. Here are some of the factors that determine how to set your mortgage rate.

Anúncios

The mortgage bond market

We all know that banks make money from our mortgages, but a mortgage is not just a simple loan your bank gives you and then you benefit from it with interest. Instead, banks package mortgages into mortgage-backed securities (MBS) and then act as intermediaries to sell them to investors.

As with many other forms of investing, investors decide what to buy based on how risky the investment is. In this case, a stable real estate market with a healthy economy reduces investment risk, so investors are willing to buy MBS at lower interest rates. When markets falter or inflation rises, investors seek higher rates to justify risk. This is one of the factors that determines the interest you pay on your mortgage

Credit history

Your credit rating plays an important role in determining the mortgage rate you receive. Your credit rating tells lenders how risky they are to lend you money—the higher your credit rating, the lower the mortgage rate, and vice versa.

Anúncios

Current market rate

The Federal Reserve sets the federal funds rate, a tool that determines the rate at which financial institutions lend to each other. When national interest rates are high, it becomes expensive for banks and other financial institutions to lend to each other. This increases the interest rate on investment products such as mortgages. This is out of your control, and if you need to buy a home when capital interest rates are high, you may consider refinancing your mortgage when interest rates are lower.

Mortgage period

Financial institutions see long-term mortgages as riskier and charge higher interest rates in return. The assumption is that people who buy a 30-year mortgage are more likely to default, so banks charge high interest rates to cover the risk. On the other hand, 10-year mortgages are considered less risky and have lower interest rates.

Occupy

How you want to use your home plays an important role in determining your mortgage rate. Due to the risks involved, primary residences have lower interest rates than investment properties. The assumption is that if you’re in a financial crisis in the middle of paying off your mortgage, you’ll work harder to pay for your main home because you live there, and give up your less-than-easy rental property to make money.

How to Get the Best Mortgage Rate: Tips

If you’re considering taking out a mortgage, be sure to review your eligibility factors to get the best mortgage rates. The following tips will help you get the best price and save money.

Anúncios

Improve your credit score

Your credit score indicates your ability to pay off your debt. A low credit score may not disqualify you from a mortgage, but it will mark you as a high-risk borrower, a title that can earn you expensive credit terms. On the other hand, a good credit rating helps banks feel confident in your repayment ability and offer you lower mortgage rates.

Build your credit score by paying off debt on time, paying off your credit card balance, and getting a secured credit card if you don’t have one. Before contacting your mortgage lender, check your credit report regularly and correct any errors or mistakes.

Pay a large down payment

Some lenders advertise that they can give you a 0% down payment on a mortgage, but they don’t tell you that this leads to high mortgage rates. Financial experts recommend putting at least 20% of the cost of your home on your down payment to reduce the amount you need to borrow. With a 20% down payment, you’re more likely to get lower mortgage rates and lower monthly payments. This also saves you on private mortgage insurance.

Take out a short-term fixed-rate mortgage

Mortgage lenders can provide you with a mortgage for up to 30 years; however, if you have a decent income, consider a 10- or 15-year mortgage, as interest rates on short-term mortgages are lower. The monthly repayments will be higher, but you will pay less for the property than if the borrower took out a 30-year loan.

Consider a Home Buyer Program

The government understands that owning a home can be a difficult journey for many people. In response, some states have created programs that offer low mortgage rates or down payment subsidies to help citizens buy homes in certain areas. If you come across such programs, take advantage of them, but make sure they’re legit before giving them your hard-earned cash.

Compare lenders

Never settle for the first lender you meet, even if they offer you the lowest interest rate. While it is important to consider the lender with the lowest interest rate, other factors such as ledger fees and APR can affect the overall cost of a loan. Ask at least three lenders for quotes and compare them.

Learn more:

Anúncios