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An estimated six million people will apply for mortgage loans in the coming months. If you’re hoping to purchase a home, you’ll most likely be one of them. An array of loan options is available to potential homeowners at this point. Each one has its own benefits, but not all of them are the best choice for all borrowers.
Several factors come into play when choosing a lender and deciding which type of mortgage loan is right for you. Mortgage rates are among the most important. Understanding mortgage rates and how they affect your long-term costs can help you make the right choice. Read on to learn more about mortgage rates, their impact on your loan, and how to get the best rates.
What Are Mortgage Rates?
In short, mortgage rates are the interest rates on mortgage loans. Mortgages can come with either fixed or adjustable interest rates. With a fixed rate, the amount of interest remains the same from one month to the next for the entire term of the loan. That said, several factors can affect your interest rates. Those include your credit score and the type of loan you choose to name a couple. Interest rates can vary depending on the term of the loan as well. For example, 15-year mortgage rates tend to be lower than those for 30-year mortgages.
Adjustable rates change over time based on specific benchmarks the lender uses. They can increase or decrease, which will affect your monthly mortgage payments. Though payments on an adjustable-rate mortgage may be lower at times, they can also be much higher. As such, they come with bit of uncertainty and can be somewhat difficult to budget for.
Which Factors Affect Mortgage Rates?
Various factors can affect mortgage rates. One is the general interest rate, which can fluctuate significantly based on the economy and the housing market. While the interest rate can change daily or even multiple times per day, many lenders adjust their rates monthly. From there, other variables enter the mix.
Type of Loan
Additionally, the type of loan you choose can impact your mortgage rate. Some, like VA and FHA loans, generally have lower mortgage rates than other options. They can require lower down payments as well. Conventional loans may have relatively low interest rates, but they’re often higher than those of VA and FHA loans. If you need a jumbo loan, which is a larger-than-average loan, it’s likely to have higher mortgage rates.
Your Credit
Your credit is another factor that will affect your mortgage rate. If you have a good credit score and a solid borrowing history, you’ll probably receive a lower mortgage rate. On the other hand, if you have poor credit, your interest rate will be higher. In the event the latter is true, taking measures to improve your credit before applying for a mortgage loan is advised.
Debt-to-Income Ratio
Your debt-to-income ratio can affect your eligibility for a mortgage loan. It’ll also impact your mortgage rate. If you have a low debt-to-income ratio, you’ll most likely get a better interest rate. For potential homebuyers who have a high debt-to-income ratio, reducing debt before applying for a mortgage loan is recommended. Doing so may take time, but it’ll result in a lower interest rate.
Getting the Best Mortgage Rate
Those are some of the elements that can affect your mortgage rate. At the same time, different lenders may charge varying interest rates or calculate their mortgage rates differently. Consider comparing loans and lenders to find the most affordable rates and taking the necessary steps to improve your credit score and debt-to-income ratio if necessary. Doing so can save you a great deal of money over time.