As anyone shopping for a new home or looking to refinance a home loan can tell you, it pays to lock in the lowest possible mortgage rate. That’s because a lower mortgage interest rate directly translates into smaller mortgage payments (and greater savings) each month.
In simple terms, a mortgage is a type of home loan offered to those who wish to borrow a set amount of funds for the purchase of a piece of real estate property. These funds – typically awarded to prospective buyers who either lack the cash to purchase a property outright or prefer to finance the purchase price of a home over time – are secured by the property being purchased. Existing homeowners also have the opportunity to refinance a current home mortgage by taking out a new loan (and paying off the balance of the first home loan) if they find that interest rates have fallen and that they can obtain better financing terms.
What Determines Mortgage Rates?
Mortgage interest charges – described in the form of a percentage rate – effectively define the amount of fees that are charged by a financial lender for the serving of your loan. Financial firms who extend mortgages to borrowers (such as banks, credit unions, and online lenders) maintain some control over these mortgage rates, but also need to remain competitive with other lenders. Noting this, fluctuations in mortgage rates set by the Federal Reserve, a government institution, tend to move with the shape of the larger housing and lending market. However, lenders do enjoy some flexibility in the interest rates that they choose to offer, with the best rates typically reserved for buyers with high credit scores, low debt-to-income ratios, a strong history of bill repayment, and a low-risk profile in general.
In other words, the government is a primary driving force in helping set and maintain mortgage rates in the market. Lenders tend to follow the general direction of the market, though they may also extend more favorable mortgage rates to certain home buyers (based on their financial history and risk profile) at their discretion. As a rule of thumb, the higher your mortgage interest rate, the more you can expect to pay in mortgage-related fees each month.
That said, two types of mortgages are generally available to buyers: fixed-interest rate mortgages (which lock in a set interest rate for the buyer) and adjustable-rate mortgages (in which interest rates can change after an initial period). When calculating your monthly mortgage payment, you’ll need to not only compute how much you’ll owe in principal and interest (monies paid toward actual loan balances and interest fees, respectively), you’ll also need to factor in expenses related to property taxes and insurance.
Several factors may impact the total interest that you can expect to pay over the life of your loan as well, including the term of the loan (15- vs. 30-year), your credit profile, down payment amount, and more.
