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Buying a home is always a major financial decision. Unless you opt to pay in cash, you’re likely to take out a loan to finance your purchase. It’s important, therefore, to understand how mortgage interest rates work.
Here’s what you need to know:
What is a mortgage interest rate?`
A mortgage rate is the interest you pay on your loan. For example, a 5% interest rate on your loan is the amount you have to pay throughout the life of your loan. Because the interest rate is based on your principal, the amount of your interest decreases as your loan balance goes down. Therefore, it is important to have interest rates top of mind when you shop for a lender.
What are the types of mortgage interest rates?
When you take out a mortgage, there are two types of interest rates:
- Fixed rate
A fixed-rate mortgage is one where the interest rate stays the same throughout the life of the loan. With the interest rate locked in, you essentially protect yourself from volatile market forces that dictate how high or how low interest rates are going to be.
The terms for a fixed-rate mortgage vary from 10 years, 15 years, 20 years, and 30 years. Rates are usually higher than a mortgage with adjustable rates.
When to opt for a fixed-rate mortgage: A fixed-rate mortgage works best for those who plan on staying put for a long period of time. It is also a go-to option for homebuyers looking for a stable monthly mortgage payment.
- Adjustable rate
An adjustable-rate mortgage is also known as a variable-rate or a hybrid loan, whereby interest rates change throughout the life of the loan. As interest rates fluctuate, so will monthly mortgage payments.
An adjustable rate mortgage typically starts low and changes over the course of a month, a year, or a couple of years.
When to opt for an adjustable-rate mortgage: This type of mortgage is for those who plan to move out of the house after a few years and those who can pay off their mortgage before the guaranteed rate expires.
How does a mortgage interest rate work?
Mortgage interest rates are based on the level of risk the lender takes on your loan. This level of risk is determined by the following factors:
- Credit history
- Credit score
- Income
- Debt
- Home price and loan amount
- Financial capacity
The bigger the risk the lender sees, the higher the interest rate.
Environmental factors, secondary markets, and investment activity also influence mortgage interest rates. A strong stock market, high inflation, and a higher unemployment rate lead to an increase in mortgage interest rates.
Talk to multiple lenders and find out the rates they are willing to offer before you make your decision.
For more information about mortgage interest rates and home purchasing tips for buyers, get in touch with me, Sasha Rahban. I am more than happy to be your guide throughout the home buying process. Call me today at 310.963.9680 or send me a message here.