What is the biggest factor in determining the price of a mortgage? It is the interest rate. How so? Read along to learn more about this very important aspect of real estate.
Most buyers these days usually do not have enough resources to cover the price tag of the house that they want to purchase. As such, they depend on getting a mortgage loan. These loans are usually payable every month, for a continuous period of several years. This significantly reduces the amount that they need to pay initially. However, it only increases the overall amount paid in the long run.
Interest Rates – What You Need to Know
There are certain terms that you need to understand at this point. One is the principal. It refers to the amount of money that you are actually borrowing in order to pay for the price of your home. On top of paying the principal off, there is also a need to pay the interest. This extra amount is an additional earning to the lender. These rates usually come in the form of a percentage from the principal that is left to be paid. This is added to the monthly payments.
The trust of the lender in your capability to pay off the loan determines the interest rate. Because of the fact that interest rates are added to the overall price of the home, it is as important to take into consideration the way in which your financial situation may have an impact on the interest rates, as well as the actual amount that you pay.
How Are Interest Rates Determined
In general, there are three factors that affect the way in which interest rates are determined.
- Credit Scores
Put yourself in the shoes of a lender. How will you be able to know that you can trust someone who is borrowing money from you? One of the best ways in which you can do so is by looking at the credit scores of a potential borrower. The credit score refers to the number that determines your credit history. Each time you purchase real estate, open a financial account or take out a loan, the credit score of a lender may be affected.
Buyers who have higher credit scores often have better credibility, and as such, can get lower interest rates compared to buyers with lower credit scores. Your capacity to pay off your mortgage will also have an impact on the overall credit score, which is why it is essential to choose a mortgage option with an affordable interest rate.
- Down Payment
The mortgage loan will pay the total price of the home, and you can remove a big piece of this price by paying a bigger down payment. A bigger down payment also provides you with the opportunity to pay less interest. For example, if you pay 20% down payment on your home, you can expect a significantly lower interest rate compared to actual buyers who are only paying 5% or 10% down.
The reason behind this? If a buyer is equipped with enough financial resources to pay a bigger down payment, it is more likely that lenders can give the trust that they will pay the rest of the house better. This means a lower level of risk, which merits buyers with a lower interest rate.
- Economic Status
The general life of a mortgage loan is 30 years. Within this period, a lot of things may change in the economy, including your capacity to pay. A good economic status at the present may suddenly shift in the next few years. In order to be guided accordingly, discussing your options with a financial advisor can help. The discussion can include deciding on the best time in which you can take out a mortgage loan.
Tips on Getting a Better Interest Rate
The following are some tips in which you can get a better interest rate:
- Look around for options on various offers.
- Pay a bigger down payment for your home.
- Observe and wait for the interest rates to go down in your area.
- Make sure that you improve your credit standing and score. This means paying off debts, paying bills on time, and taking care of your credit card obligations.
- If possible, get a mortgage rate that is adjustable. The interest rate may go up through time, but it usually starts at a lower rate compared to fixed-rate mortgages.
- Provide evidence that you are trustworthy enough. This proof may include a detailed employment history.
Other Potential Factors that Determines Mortgage Rates
Aside from the interest rate, there are other possible factors that determine mortgage rates. This includes the following:
- Price of the Home
The price of your home usually has a huge impact on the price of the mortgage. On top of that, renovation plans and property taxes also affect your mortgage. Extra loans or payments may also have an impact on your capacity to make payments monthly.
- Terms of the Loan
You will end up paying more in a mortgage loan that lasts for 30 years. True, you will only have to pay less every month, but for every month that you are paying off the mortgage, more interest is accumulated. On the other hand, a 15-year fixed rate mortgage may end up with you paying more, but more of the loan will be completed every month.
Another factor which may increase the mortgage price is adjustable-rate loans. They increase the interest rate through time. These rates may also change depending on the adjustment periods covering the loan, including the conditions in the market.
With all of these factors taken into consideration, it is often best to select the best loan that comes with the best interest rate. If you are planning to get a mortgage loan soon, it is recommended to prepare accordingly. You may discuss your options with a lender in order to see the coverage, as well as other factors which may affect the overall price of the mortgage.