LOAN FAQ: Interest Rate

All About Interest Rates

Mortgage Loan Interest Rate: General Overview

Mortgage rates determine how much interest accrues on your home loan. The higher your rate, the more interest you'll compile and the more money you'll end up paying for your house. From a financial perspective, one of the single most important things you should be aware of is whether you have a fixed-rate mortgage or adjustable-rate mortgage.

Fixed vs. Adjustable Mortgage Interest Rates

  • ◉ Fixed Mortgage Rate
    With a fixed-rate mortgage, the amount of your monthly payment that goes toward principal and interest usually stays the same for as long as you have the loan. Although over time you’ll eventually pay more toward principal than interest, the actual amount of the payment usually never changes. The advantage of a fixed-rate mortgage is certainty. Your payment is going to stay fairly consistent. There are also a variety of options for your payoff term.

  • ◉ Adjustable Mortgage Rate
    ARMs work a bit differently. They typically start with a lower rate. This teaser rate remains fixed for the first several years of the loan – typically a period of 5, 7 or 10 years. After that, the rate will periodically adjust up or down according to the market.

    ARMs may temporarily give you a lower rate, but they also come with a higher level of risk, so it’s best to use them only if you know you plan to move by the time the rate adjusts or if you’re totally comfortable with the possible fluctuation.

What affects mortgage rates?

  • ◉ Type of Loan
    Certain loans are more likely to have higher rates. Generally, lower qualifications mean a higher rate.

  • ◉ Having Multiple Mortgages
    Your mortgage rate will also be affected if you take out a second mortgage. Some homeowners take out a second mortgage to access their home equity, or the amount of the home they own. Because your first mortgage takes priority, your primary mortgage will be paid off first if you run into financial trouble.

    Due to the increased risk associated with these loans, second mortgages have slightly higher rates than primary ones. By contrast, in a cash-out refinance, you take out equity based on your primary mortgage and you can get a lower rate. In addition, you can roll your second mortgage into your refinanced primary mortgage.

  • ◉ Income
    Your income and DTI have an impact on your mortgage rate as well. Higher incomes likely mean you’ll have more resources available. This doesn’t mean you have to be a millionaire to purchase a $250,000 house, but the lender wants to see that you can comfortably make your monthly payment. This is determined by looking at your DTI ratio.

  • ◉ Property Value
    When you buy a house, you know what you can afford and plan to make the payments. If you fall on hard times, however, you’re likely to pay off certain expenses before others.

    Interest rates are higher for second homes and investment properties because if something were to go wrong, you’d likely make the payment on your primary residence first.Interest rates are also different based on whether it’s a single-family property or a multi-unit complex like condos.

  • ◉ Your Assets
    Higher assets are another thing that can work in your favor. Assets are things not related to your annual income that could be used to help pay off your mortgage. This could be proceeds from the sale of property, stocks, bonds, mutual funds, etc. Obviously, the more assets you have, the greater your ability to repay and the lower your interest rate will be.

  • ◉ Credit Score
    All lenders look at your credit score and history to determine your mortgage eligibility. In general, the higher your FICO® Score, the lower your rate. You keep your credit score up by making timely payments for your house, car, credit card and so on.

  • ◉ Market Variables
    When you get a mortgage, it's usually purchased by a mortgage investor and made available on the bond market as part of a mortgage-backed security (MBS). Yields run inversely with demand in the MBS market. The higher the demand for MBS, the lower the yield needs to be to attract investors. Lower yields mean lower mortgage rates.

What is a good mortgage rate?

Beyond looking at current market factors like today’s interest and CMT rates, another way to talk about getting the best mortgage rate is to think about your financial situation. Your interest rate depends on your IPAC, or your income, property, assets and credit. Consider these areas of your finances and how they can influence your mortgage rate.

If you’d like to compare options and find the best mortgage rate for your needs, please fill out the form below and we'll take care of the rest.

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