When you’re thinking about buying a home, you’ll want to start looking at mortgage options to see what may work for your needs. If this is your first time (or maybe even 2nd or 3rd!) buying a home, you might be a little overwhelmed with understanding mortgage rates and how your final rate is determined. Every lender breaks it down a little bit differently, so how do you determine the best mortgage option for you? Contacting your local mortgage lender is the best place to start, but this article will outline at a high level what you need to know about mortgage rates.
What is a Mortgage Interest Rate?
When you buy a home and get a mortgage through a lender, you’ll be expected to make monthly payments to ‘repay’ the sum that you borrowed. A mortgage interest rate is a percentage of this sum or loan balance that is paid to the note holder along with your principal payment. Interest rates, like the stock market, fluctuate daily and will also vary based on your individual financial situation (see below). Lenders often get the question, “what are today’s mortgage rates?” With so many variables that go into the rate, it can be difficult to provide an average before fully understanding your specific financial situation and needs.
Once you’ve locked in an interest rate, it will remain the same for the life of your loan unless you choose to refinance your mortgage at any point or if you choose an adjustable-rate mortgage, which can fluctuate based on the market over the life of the loan. The interest component of your loan payment will decrease as you pay off more of your loan balance. You’ll find this number in the ‘Loan Terms’ section of your loan estimate.
What Does APR Mean?
While your mortgage interest rate is a percentage of the amount borrowed, your APR (annual percentage rate) is a more complete representation of the costs to borrow money and is based on the interest rate, points, and other costs associated with your loan. For these reasons, it is typically higher than your mortgage interest rate. You can find this number in the ‘Comparisons’ section of your loan estimate.
What Determines My Interest Rate?
While overall interest rate ranges are based on what’s happening in the economy, the actual rate you’re given is based on multiple factors related to your financial background. Generally, having a strong financial history leads to a more favorable interest rate. Here’s what goes into your rate:
- Credit Score. Your credit score is used to determine how reliable you’ll be in repaying your loan. A higher credit score generally leads to a lower interest rate.
- Loan-to-Value Ratio. Your LTV is calculated by dividing your loan balance by the home’s appraised value. Typically, the lower your LTV, the better your interest rate since you’ll have more equity in the home.
- Loan Term. There are several options when it comes to repayment terms and while a 30-year mortgage tends to be the most popular, a 15-year mortgage often comes with lower interest rates. In general, a shorter term will provide you with a lower rate, but keep in mind that your overall payment will be higher since you’re paying off the balance in a shorter amount of time.
- Loan Type. With many loan programs to choose from, you’ll find that interest rates vary somewhat depending on which option you select. Some of the most popular options include Conventional, FHA, VA, and USDA loans.
Should I Always Go with the Lowest Rate?
As part of shopping around for a mortgage, you’ll notice that interest rates vary amongst lenders. While it may be tempting to automatically choose the option with the lowest interest rate, it’s important to pay attention to all of the numbers in your loan estimate when choosing a lender. For example, the interest rate may be lower, but what if the APR is higher or the closing costs are significantly more? You’ll find that sometimes a lower interest rate isn’t the best option after all! Sometimes the lower interest rates are offset by other costs, meaning you may end up paying equivalent or more when all is said and done.
Understanding interest rates may be tricky, but at C&F Mortgage, we’re here for you and will help you navigate the mortgage process from start to finish! Get in touch with our local industry experts today to begin your journey toward homeownership.