Happy May and may the fourth be with you! I hope everyone is having a nice and productive spring so far. This month I’m discussing in a little more detail the main factors that impact one’s mortgage interest rate.
I’ve talked a lot about different variables in the housing market, especially how low inventories in Maine and New Hampshire are helping to drive up costs for home buyers. So this month I thought I’d change lanes a little bit and talk about home mortgage interest rates – what important components go into your final rate and how these factors and components can affect the housing market.
Of course, it should be noted first and foremost that I’m not a mortgage broker and that my professional expertise is in assisting clients with buying or selling real estate. For the most nuanced and detailed information on home mortgages and home mortgage interest rates, you should be sure to talk to a mortgage professional.
If you need one, ask me and I’ll be glad to refer you to a trusted and reputable professional.
But I don’t intend for this blog post to be a complete guide into the world of home mortgage interest rates but merely an introduction to some of the more important factors – a starting point for anyone interested – pun intended – on where that percentage comes from.
Boiled down, interest rates are really a confidence rating. The more confident a lender is that you’ll pay back on your mortgage, the lower the interest rate will be.
Three main factors that impact a home mortgage interest rate are: your credit score, the down payment and loan-to-value on the mortgage, and the length or term of the loan.
We’re going to start off with your credit score. Your credit score gives lenders a quick snapshot of how trustworthy you are with credit, meaning it helps lenders determine how confident they are that you’ll pay them back on the loan.
Most people know that your credit score is a key determinant for a home mortgage pre-approval, but it’s important to also remember that your score will affect your rate too.
How does this all work out on the lender’s side? A higher credit score means higher confidence, and higher confidence means less risk, and less risk means a lower interest rate for you.
Thank you for sticking with me there!
Seriously, though. A little more than a hundred point difference in your score can save or lose you over a percentage point on your interest rate. Estimates will demonstrate for you the most accurate differences, but on median house prices around here, we’re talking about saving several hundred dollars on your monthly mortgage payment, which for the whole term of your mortgage adds up to tens of thousands of dollars saved or lost in interest.
Don’t sleep on your credit score and how much it can change your spending power in the housing market!
Next up we’re talking about how the down payment and loan-to-value affects your mortgage interest rate.
Like your credit score these factors ultimately determine the risk of the overall loan.
Let’s discuss your loan-to-value first. This is the percentage of how much you’re borrowing to the overall value of the home. The closer the two are, the more riskier the loan, and the higher your interest rate will be.
Most loans, especially conventional ones, require a certain percentage for a down payment. A large down payment can reduce your loan-to-value and help lower the interest rate on your home mortgage.
The final factor I’ll be discussing is the overall length or term of your home mortgage. The 30-year mortgage is the most common and makes up for approximately 70% of all home mortgages in the US.
30-year mortgages offer more reasonable monthly payments, but they’re not your only option. You can choose a shorter term for your home mortgage.
In most cases, shorter loans, like 15- and 20-year mortgages, offer lower interest rates. If you’re able to afford a sizable down payment to lower the overall cost of the loan, choosing a shorter-term mortgage with a lower interest rate may be a viable option for you.
As mentioned before, I didn’t intend for this post to be a comprehensive review on home mortgage interest rates, and there are many other factors that go into your final rate, but I did want to include the most important contributing factors that you, as an applicant, have the most control over.
Things like the economy and the Federal Reserve also play key roles in setting market rates that play into your personal home mortgage interest rate too, but these factors are largely out of your control.
Before I conclude, I wanted to discuss how interest rates affect the housing market. We’ve seen how small adjustments in your rate can change your overall mortgage and monthly payments dramatically.
This can mean a lot for your overall spending power in the market. As rates move around, so do affordability ranges, shifting demand across many different price points.
Whether you’re buying or selling real estate, it’s important to realize how much interest rates can affect market values, increasing demand and prices here and decreasing demand and prices there.
We recognize the importance of home mortgage interest rates on buyers, but given the overall effect rates have on the market, they can impact potential home sellers too.
That’s why it’s important for me as your trusted broker to stay on top of these changes to provide you with the most accurate and up-to-date information possible.
If you have any questions or concerns, or anything you want to add to the discussion, feel free to shoot me a message any time!
