In response to market volatility at the start of the COVID-19 pandemic, the Federal Reserve reduced its benchmark interest rate for the first time in over a decade, creating a ripple effect in the market. For homebuyers, this has translated into historically low mortgage rates. Now is a great time to study the mortgage rate you might qualify for on a future home.
What is a mortgage rate?
Your mortgage The rate is the percentage of interest that a lender charges for granting the loan you need to buy a home. Interest helps cover the costs associated with lending money – and there are many factors that determine the rate you are offered. Some are specific to you and your financial situation and others are influenced by macro market conditions, such as the overall level of loan demand in your region or nationwide.
What factors determine my mortgage rate?
The most common factors determining a mortgage rate are your credit rating, the location of the property, the down payment amount, the loan terms, and the type of loan.
“Many mortgages are [paid back in 360 payments] over 30 years. Shorter term loans, like 10, 15 or 20 years, have lower interest rates, ”explains Clint Lotz, president and founder of predictive credit technology company TrackStar. “A larger down payment means a lower interest rate; if a buyer can make the 20% down payment, that’s fine, but if not, lenders will usually require the buyer to buy PMI: private mortgage insurance. “
In addition to the length of the loan, the type of loan will have an impact on your interest rate. Some loans have a fixed interest rate for the life of the loan, while others have an adjustable rate, which could result in significantly higher payments over time.
What credit rating do you need to get a mortgage?
Most conventional loans require a credit score of 620 or higher, but Federal Housing Administration and other types of loans can accommodate lenders with scores as low as 500, depending on your down payment. If you have a high credit score, you may be offered a lower interest rate and a smaller down payment. Improve your credit rating before you apply for a mortgage can save you money even if you already qualify for a loan.
“Credit is the most important factor in the interest rates of mortgages and all other loan products, so ensuring that credit balances are below 30% is essential to maximize a credit score ”, Lotz explains. “If a person finds errors in their credit report, they should dispute them to ensure the most accurate history.”
What is the annual percentage rate and what does it mean for mortgages?
Your annual percentage rate is a key factor in choosing a mortgage. The Federal Open Market Committee lowered the US prime rate in 2020, which paved the way for today’s relatively low rates: the interest rate offered to you by a lender is based on the prime rate plus the premium that the lender offers. The institution decides to bill you, based on your financial situation.
What is the impact of the APR on capital and interest?
More Mortgages are based on an amortization schedule: you pay the same amount each month throughout the life of the loan, although the interest generated will be highest at the start of the loan and will decrease as the principal decreases. (Your amortization schedule will show how much of your monthly payment is spent on interest and loan principal repayment.) Ultimately, most borrowers appreciate the convenience of a fixed, predictable monthly payment.
What else can impact my rate?
Getting a good mortgage rate requires building credit, but also managing it well, including saving for a down payment and keeping extra savings on hand to cover unforeseen expenses.
In most cases, you don’t want to stretch your down payment too much that you find yourself running out of cash when you move into your home, and keeping cash savings can help your lender feel confident in your ability to repay the loan. loan, potentially lowering your rate.
“Banks are very keen on making sure borrowers have enough savings in reserve after closing. A good rule of thumb is six months of mortgage / tax and insurance for loans under $ 750. $ 000 and 12 months for jumbo loans “, explains Melissa Cohn, executive mortgage banker at William Raveis Mortgage, based in Connecticut.
“The FICO company allows a borrower to compare offers and rates from different lenders, but borrowers need to make sure they’re within that one-day window or their scores will start to drop from over-investigation. “
Shop Mortgage Rates
Mortgage lenders often post their rates for different types of mortgages online, which can help you find and narrow down the lenders you are applying to. prior approval. Shopping is an important part of the process. And it is often a mistake to speed up the process.
“The best price [should be considered] – but equally important, the best service and with a reliable lender who can close the rate promised, “Cohn says.” It’s one thing – especially right now – to get a rate. It is a very different matter to shut it down in time. “