If you are taking a loan to finance your home purchase, you will be paying interest on that loan. While paying interest is an inevitability, you do have some
control over how much interest you pay
. Understanding how lenders determine mortgage interest rates can help you make sure you are getting the best rate for you. Here is everything you need to know about mortgage interest rates.
What is mortgage interest?
Mortgage interest is a fee that your lender will charge you for agreeing to loan you the money to buy a house. A mortgage interest rate will vary from lender to lender and even from person to person at the same lender. Every month, a sizable portion of your mortgage payment will go towards paying down interest. As you make payments on your loan and the principal balance decreases, your interest will also decrease and more of your payment will go towards the principal balance. The lower your interest rate, the lower the total cost of your loan and your monthly payments will be.
How is a mortgage interest rate determined?
Ultimately, your mortgage interest rate will be determined by your lender. Using a variety of factors, your lender will try to gain a better understanding of your finances and your likely ability to repay a loan
. These factors include:
- Credit score: The higher your perceived creditworthiness, the lower your interest rate.
- Home location: Where your home is located and the real estate market that area is currently experiencing can impact the interest rate.
- Loan type: Conventional, VA, FHA, or other special loan programs come with different criteria for interest rates.
- Loan amount: Your total loan amount is the cost of the home plus closing costs minus your down payment. Depending on how much the loan is, your interest rate can increase or decrease.
- Loan term: The amount of time you agree to pay back the loan can impact the interest rate.
- Down payment: The more money you put down, the lower your interest rate is likely to be.
- Type of interest rate: A fixed interest rate will stay the same across the lifetime of the loan, while an adjustable interest rate will change based on the ups and downs of the market. An adjustable interest rate may seem lower at first, but could end up much higher during the life of the loan.
Lenders use the above factors to determine where you fall on the range of mortgage interest rates they offer. Before you even apply for a mortgage through a specific lender, you should check what interest rates they offer to get a good idea of what you can expect the total cost of your mortgage to be. If you have determined a specific lender’s rates are too high, you can look into other lenders.
Buying a home is often the biggest investment most people make in their lives. Considering how much people spend on interest over the life of a loan, making sure you get the best deal possible on your interest rate can greatly impact your finances. Veitengruber Law
is a an experienced real estate law firm in New Jersey. This means that whether you are a first time homebuyer or trying to get a better deal on a new investment property, we can provide assistance or connect you with some of the best real estate professionals in the area.