Finding the Right Mortgage Rate
We all agree: shopping for mortgages can be a painful. Monitoring interest rates, filling out loan applications, choosing a lender — all the choices and numbers can be a bit much. However, it’s worth the research and time. Comparing mortgage rates across lenders is one of your first actions in the home buying process. This allows you to budget by giving you an idea of what your monthly mortgage payments will total. Even small differences in the interest rate on a six-figure loan will pile up over the life of a 30-year mortgage. This can have a major impact on your financial goals.
As a modern homebuyer, you have many different leading options. You can find reviews, rating, customer experiences and all sorts of information from all kinds of sources. In the past, you would have to go to your bank when you needed a mortgage lender. Now there are a variety of lenders to chose from
Although rate shopping may be unpleasant, it is worthwhile. Mortgage lenders want your business and the first offer may not be the best offer you could get. Compare mortgage rates and choose wisely. Using our mortgage calculator, you can find out what you might qualify for with several different lenders.
The factors affecting your possible mortgage rate aren't fully in your control, as you can see in the graph above where mortgage rates fluctuate year after year. However , you do have complete control over some of the elements that affect your mortgage rate. Making oneself seem like a more reliable borrower is the key to getting a lower interest rate.
Lenders charge varying rates to different borrowers based on how likely each person is to not continue payments. Because the lender is putting money up front, the lender selects how much risk it is prepared to take. Lenders can reduce losses by charging higher interest rates to riskier borrowers.
Lenders can evaluate potential borrowers in a variety of ways. Lenders, someone with lots of resources, consistent income, and a decent or superior credit score is more likely to continue making payments. A significant shift in circumstances would be required for this type of homeowner to stop making payments, or default.
A potential borrower with a history of late or missed payments (basically meaning a low credit score) is thought to be far more likely to default. Another danger indicator is a high debt-to-income (DTI) ratio. This occurs when your salary is not high enough to cover your whole debt burden, which may include college loans, vehicle loans, and credit card payments. Any of these variables may indicate to a lender that you are a high risk for a mortgage.
If you have poor credit, it may be best to wait before applying for a mortgage. Waiting, according to many lenders, is the best method to secure a low mortgage rate. It is something to think about when making a financial choice.
Example of Mortgage Rate Selection
Assume you have a high FICO credit score of 750 to 850, savings and investments for the suggested 20% down payment, as well as a net income more than three times your monthly payment. Lenders will regard you as a dependable borrower who will make timely payments, therefore you will most likely qualify for the lowest advertised mortgage rates.
If your credit score is low and you don't have enough money saved for a down payment, your lender may decline your mortgage application or refer you to government-backed loans from the Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA) (FHA). Many federally funded program enables lenders with fair or decent credit to qualify for house loans even if they do not match all the standard criteria.
Most of the time, these programs offer loans with fixed rates for 30 years and lower down payments that homeowners can finance or pay for with grants, if they are available. While these can be great for borrowers who can't meet all requirements for a conventional home loan, they often accompany some sort of mortgage insurance, which adds to the expense of your month to month housing payments.
How are APR and Interest Rate Different?
The actual cost of the mortgage is the annual percentage rate, or APR. It calculates all of the fees and charges you pay when you get the mortgage, like closing costs, over the life of the loan so you can get an idea of what you're actually paying through a yearly rate.
In contrast, the number used to calculate your monthly payment is your stated interest rate. It's the annual interest payment, without any other costs, based on a percentage of the loan balance. The annual percentage rate (APR) offers a more comprehensive view of your costs than the other rate.
To avoid hidden or unexpected costs, the federal government compels banks to display the APR. When comparing two loans, looking at the APR might be helpful, especially if one has a relatively low interest rate but higher closing expenses and the other has a higher interest rate but low closing costs. The mortgage with the lower APR may be the better overall value.
To account for all fees and expenditures, the APR is usually greater than the advertised interest rate. However, it is usually just a few fractions of a percent higher; anything greater than that should be taken seriously. When comparing 40-year and 30-year mortgage rates, those expenses are spread out over a longer period of time. The APR is unlikely to be substantially greater than the interest rate. However, the gap between the APR and the interest rate is likely to be bigger for 20-year mortgage rates, 15-year mortgage rates, and 10-year mortgage rates.
