Your mortgage rate is a big deal. Since a mortgage is such a large loan, and since the term spans decades, a 1% difference in your mortgage rate can mean a savings of tens of thousands of dollars over time. Getting the best mortgage rate when you buy a home is a must if you want to maximize your finances.
Understanding what influences your mortgage rate can go a long way toward helping you take steps to ensure that you get the best deal possible. Here are 6 of the factors that are likely to influence your mortgage rate:
1. National Mortgage Rates
Mortgage rates are often set with an eye toward national averages. Mortgage rates often take their cue from the 10-year Treasury note. If the yield on that note is heading higher, mortgage rates often follow suit. Treasury yields are influenced by a number of economic and monetary policy factors, including Federal Reserve policy. Right now, the fact that the Federal Reserve is buying tens of thousands of dollars in Treasury assets is one of the influencing factors.
The national average for the week is often one of the starting points for what to expect when you start the mortgage process.
2. Local Mortgage Rates
Of course, mortgage markets are local, so there are factors close to home that can influence lenders to charge higher or lower mortgage rates than the national average. If lenders are having a hard time attracting business, they might lower their rates so that they are more attractive, encouraging home buyers to borrow from them.
Checking your local rates in relation to national rates can be a good place for you to start when determining your mortgage lending options.
3. Your Credit Score
Now that you know where the averages are, the next biggest factor influencing the mortgage rate you will end up with is your credit score. Your credit score is a basically a measure of risk. Are you likely to default on the loan, leaving the lender to pick up the tab? If you have a high credit score, you will be eligible for the lowest interest rates available because you are seen as a low default risk. A lower credit score, though, will mean that you will have to pay a premium in order to convince the lender to take the chance that you will default.
If you have a credit score below 620, you probably won’t qualify for a conventional mortgage. If your score is below 580, you won’t even be able to qualify for a loan backed by the HSA.
4. Your Term Length
The length of your term matters. If you choose a 30-year loan, you will pay a higher interest rate than you would if you had chosen a 15-year loan. The longer you take to pay off the loan, the greater the risk that something will happen to your finances causing a default.
5. Fixed Rate vs. Variable Rate
A fixed rate mortgage often comes with a higher interest rate than a variable rate loan — at least at first. Variable rate mortgages start with a lower rate because lenders expect mortgage rates to go up over time. Even if you get a 5/1 hybrid, which means your rate is fixed for the first five years of your mortgage, and only goes up once a year after that, the lender stands to make more over time if economic conditions and monetary policy decisions lead to higher rates in the future.
6. Points Paid/Down Payment
The amount you are willing to pay up front can also lower your interest rate. A larger down payment can lower rate, especially if you put 20% down. You can also pay points to reduce your mortgage interest rate. Generally, paying a point (which amounts to 1% of your loan amount), can reduce your interest rate by a quarter of a point. If you know you will be in your home a long time, it can be worth the cost to pay points up front.
Carefully consider your situation so that you reduce your mortgage rate and save money on your home loan.