We always want to know what our interest rate is going to be when we are looking to purchase a property using financing. Of course, it makes sense – the higher the rate, the higher the payment, and we certainly do not want to pay more than we have to. Below are four things (or more) you will find helpful when looking at interest rates:
1. In case you have not heard or read about it, mortgage interest rates are very, very low at the moment – generally in the mid 3’s on a mortgage below $417,000 (Thank you, Brexit). When I first got into real estate back in 2006, 6% or 6.25% was considered a good rate. We know an interest rate of 3.5% is better than 6.25%, but how much better exactly? Here is an example. A $200,000 loan to be a paid over 30 years at the lower rate means $333.34 per month or $4000.08 per year less compared to your payment at the higher rate. That means we have to be really appreciative of these great rates and take advantage of them. Rates have been quite good after the housing market crash – we have seen anywhere from low 5’s to low 4’s and high 3’s, but currently they are phenomenal and that can really make a difference in how much money you could be saving per month by simply buying when mortgage interest rates are low. If you want to compare what difference a quarter or half or one percentage point makes, use this Mortgage Calculator.
2. The interest rate published online is not necessarily the interest rate you will get. Read the disclaimers that come in small font at the bottom; they will usually list a particular score, down payment, loan amount, and pre-paid interest (Discount Points), and even location as conditions for that rate. A lot of factors are taken into consideration when YOUR interest rate is determined. Here are most of them:
Credit Score is very important. Even though you may be able to get a loan with a lower credit score like 580 or 620, it is worth improving your credit in order to take advantage of better rates (and better loan terms), typically above 700. If you are not sure how to raise your credit score, you can always talk to a mortgage professional early enough when you know you want to buy a home and get advice based on your personal situation.
Loan Amount does matter and down payment can make a difference too. You will not get the same rate on a mortgage of $100,000, $200,000 or above $417,000 (the so-called Jumbo Loans). Typically, you will get a higher interest rate if the loan amount is very small or very high. Also, if you put a larger down payment of 20% of the purchase price, for example, you are considered a lower risk by the lender and you may be able to get a better rate. Keep in mind though that in today's market, you can have a great rate and buy a home even if you do not have 20% to put down.
Length of Loan and Loan Type are two other factors that affect your interest rate. If you can afford and qualify for the monthly payments over a 15-year period, you will get a much better interest rate and will save a considerable amount of money compared to the more common 30-year mortgage. At the same time, conventional, FHA, and VA loans have different interest rates, but choosing one loan type over the other depends on a number of things and interest rates are usually not the primary factor.
Whether your rate is Fixed or Variable can make your monthly payment higher or lower. As the name suggests, a fixed rate will not change over the length of the loan while a variable rate will. It will be fixed for a certain period of time, 5 or 7 years for example, and then change according to the current mortgage interest rate. If you choose a 5/1 ARM (adjustable rate mortgage), you will get a fixed rate for 5 years (it will be a great rate if you are looking to buy now) and then your rate can change once every year. Subsequently, your mortgage payment can change too by going up or down. While a 30-year fixed-rate mortgage is most common, a variable rate, even though it is risky, may be an option as well, especially if you are planning to sell within the fixed-rate period.
Down payment or closing cost assistance sounds great, but it usually comes with a price tag. If you are using a down-payment assistance program, or your lender is “paying” part or all of your closing costs, be aware that you may be charged a higher interest rate. That may still work for you, especially if you are short on cash needed to purchase a home and because mortgage interest rates today are so low.
Another thing to keep in mind is that interest rates change daily or possibly more than once during the day, so the day you choose to lock YOUR mortgage rate may make a difference. You may also get a higher rate if your lender locks (guarantees) your rate for a longer period of time (let's say 60 days instead of 45 days).
Finally, the rates that you see online by banks or mortgage companies licensed to do business in multiple states are also based on location, so please keep in mind that the rates may be different in your state.
3. APR and Interest Rate are not the same thing. When you see an interest rate quote, you will also see another percentage number next to it called APR (Annual Percentage Rate). The APR is higher than the interest rate; it shows the annual cost of the loan as a percentage and includes the interest rate together with other costs associated with the loan like fees lenders charge. That number is helpful when you compare lenders, so pay attention to that number as well.
4. The interest rate is not the only thing that determines your mortgage payment. You have your principal (the actual loan amount), property taxes, home insurance, and mortgage insurance if you put down less than 20% of the price of the home. So, even if you get a fixed-rate mortgage and your interest rate never changes, your mortgage payments can change if your annual property taxes or home insurance rate go up or down. While home owner’s association fees are not part of the mortgage payment, the lender does take them into account when calculating the maximum monthly payment you can afford, so do not ignore those fees, especially when you are purchasing a town home/condo.
If you have found this article useful, please share it and know I am available to help with any aspects of the purchase process and refer you to some of the best mortgage professionals in Atlanta, GA. Even though this article is about mortgage interest rates, it is worth noting that choosing a mortgage professional should not be based solely on interest rate as service, communication and honesty go a long way when you have a home under contract and a loan in process.
If you are interested in reading further on the the topic, check out this great article below:
About the importance of credit scores when buying by Bill Gassett
About the different types of mortgages by Kyle Hiscock