The homebuying process is complicated, especially for first-time homebuyers. In addition to figuring out the specifics of the home they want, they also have to deal with financing their home. This is where a mortgage comes in. However, since buying a home is one of the biggest purchases you’ll ever make, it’s essential to understand the ins and outs of mortgage rates before investing. Making a mistake at this point can cost thousands, making it critical to learn as much as possible.
That’s why Robert DeFalco Realty is discussing the mortgage market and mortgage rates in this article. By the end of this article, you will know what a mortgage rate is, why it’s important, and which factors affect it.
What Are Mortgage Rates?
If you’re a complete beginner, the first thing to discuss is mortgage rates. Essentially, this refers to the payment you make when you borrow money to buy a home. When you take on a mortgage, you pay a substantial amount in interest. This annual cost is the cost of borrowing the amount and is known as a mortgage rate. Therefore, mortgage rates are the interest you’ll pay every year. This is usually noted as a percentage of your overall loan balance.
Types of Mortgage Rates
Before taking on a mortgage, it’s essential to understand the different types of mortgage interest rates. The main types of mortgage rates we will cover here are fixed-rate and adjustable or variable rate mortgages.
Fixed Mortgage Rates
With a fixed rate, your interest rate doesn’t change throughout your loan. For those who value consistency, this is excellent. Since borrowers have to pay the same amount every month, they can budget accordingly. However, a fixed mortgage rate is likely to be higher than an adjustable one. Additionally, having a fixed mortgage rate means you won’t be able to take advantage of lower monthly payments if interest rates fall.
Adjustable Mortgage Rates
An adjustable mortgage rate is different. The interest you pay depends on a number of factors but fluctuates. It may remain the same for a specific period. However, you can expect changes to the rate and your monthly mortgage payment as time passes. Since your monthly payment can go either up or down, you must have savings that can account for fluctuations.
An advantage of adjustable rates is that they’re usually discounted at the start. Therefore, at the beginning, your mortgage interest rate will likely be lower.
Fixed vs. Adjustable: Which Is Better?
When most people research mortgage rates, their first question is which type of mortgage rate is better. However, both types have their advantages and disadvantages. Neither type is better, but one or the other may be more suitable for your situation. An adjustable rate costs less initially but doesn’t have the security and consistency that comes with a fixed rate. That being said, if interest rates rise, you’ll end up paying more with an adjustable rate.
How Do Mortgage Rates Work?
Mortgage rates aren’t the same for everyone. While a few overall factors do affect mortgage rates, your personal financial situation is also a big factor. Thus, there are many different components involved in determining your final mortgage rate. Knowing about these factors is critical because you can then know what to expect in the future. Additionally, these indicators are important when making large financial decisions, such as getting a mortgage.
Economic Factors
A lot of what determines your mortgage rate is out of your control. This includes the larger economic factors at play. For example, inflation rates, how strong the economy is, and the value of stocks and bonds all play a role in determining mortgage rates.
House Prices
There is an inverse relationship between house prices and mortgage interest rates. When house prices are high, mortgage interest rates tend to be low. When house prices are lower, mortgage interest rates tend to be higher.
Credit Score
Your credit score is one of the biggest factors affecting the mortgage interest rate. A good credit score (760 or higher) can earn you a lower interest rate as lenders will consider you a reliable borrower. Additionally, your credit score determines which type of mortgage you’ll be eligible for. For example, you’ll need a higher credit score for conventional mortgages than government-backed loans. This can also vary mortgage rates and impact how much you end up paying.
One mortgage report showed exactly this. Different annual percentage rates (APRs) are offered to homebuyers with different credit scores. In this case, those with credit scores of 760 and above had an APR of 2.86%. Those with credit scores between 680 and 719 had an APR of 3.09%. While this doesn’t seem like a large difference at first, it adds up over the years. The difference between what the groups paid came to approximately $13,231 over a 30-year mortgage.
Overall Financial Situation
While your credit score is an important factor in determining your mortgage rate, it’s not the only one. Lenders also consider other things pertaining to your finances. This includes your income, the down payment you’re making, the total sum you’re borrowing, and more.
Lender
It’s not just the economy or your finances that play a role in determining your mortgage rate. Mortgage rates can often differ from lender to lender. That’s why it’s imperative to compare different offers and not depend on a single mortgage lender. Shopping around can help you secure a better rate.
How Robert DeFalco Realty Can Help
A real estate agent is an integral part of buying a home. However, realtors don’t just help you with finding homes and negotiations. They can also recommend mortgage experts, connect you with those who know about mortgage rates, and more. At Robert DeFalco Realty, we pride ourselves on going above and beyond for our clients.
If you’re buying a home or have other real estate needs, don’t hesitate to reach out to us. You can call us at 718-987-9700 or visit our various New York offices. Alternatively, you can contact us online here. We look forward to helping you tackle the real estate market.
