After years of saving up a down payment and getting a feel for the types of and prices on homes in your area, you’ve decided that it’s time to buy. But, now that you’ve started looking into getting prequalified for a loan, you’ve discovered one thing: mortgage interest rates fluctuate widely. One lender offered one rate, another offered a slightly higher rate, and still a third offered a different interest rate. It’s not just you. There’s a lot that goes into the interest rates lenders offer. Some of it you can help and some of it you can’t.
The Market
The market plays a big part when it comes to mortgage interest rates. Generally, rates are higher during economic good times and lower during periods of recession. In some cases, interest rates might be artificially lowered in an attempt to keep money flowing. For example, after the housing crash, the practice of quantitative easing, or the purchase of securities by the Federal Reserve, pushed interest rates down to encourage people to continue to buy homes.
Your Credit
While you can’t control the market or say when there will be economic good or bad times, you can change a few other factors that affect mortgage rates. One of the things you can change is your credit score. Typically, the higher your score, the lower your interest rate. Most people will have a variety of credit scores compiled by different agencies, based on information in their credit histories and reports.
A company such as Fair Isaac Corporation, which developed the three digit FICO score beginning in the 1960s, looks at how long you’ve had credit, whether you pay on time, and how much you’ve borrowed. Numbers closer to 850 send mortgage lenders a signal that you’re a pretty safe bet when it comes to paying back your home loan, meaning you’re likely go get a better rate than someone with a lower score.
Length of the Loan
Generally, lenders want to play it as safe as possible when it comes to mortgages. Although 30-year mortgage terms are common, people typically get a better interest rate when they take out a loan with a shorter term, such as 15 or 10 years. The shorter term leaves less time for a person to default. But, while a 15-year or 10-year loan might give you a better interest rate, it might not be the best option for you. Monthly payments are usually much higher with shorter loan terms, since you’ll be paying back the full principal within about half the time.
Down Payment
The amount you can afford to put down when you take out a mortgage also plays a part in determining your interest rate. Typically, putting down less than 20 percent of the price of the home means a higher interest rate, since the lender is taking a slightly higher risk in loaning you more money. Along with a higher interest rate, a lower down payment also means paying private mortgage insurance, which adds to the cost of the loan.
Interest isn’t the only thing to consider when applying for a mortgage, but it does play a part in terms of your monthly payment and how much you spend over the life of the loan. As long as rates are still relatively low, if you focus on boosting your credit and saving for a down payment, you’ll most likely end up with a rate you’re happy about.
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