What is a mortgage interest rate?

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There are several steps to buying a home. Along with finding the right property, you’ll go through the process of getting a mortgage, ideally with the best possible interest rate. The lower your rate, the lower your monthly payment and the lower your mortgage costs.

If this is your first time getting a mortgage, here are the basics of interest rates.

What is a mortgage interest rate?

The interest rate on your mortgage determines what you’ll pay to borrow money from a lender, expressed as a percentage.

In general, short-term loans, such as a 15-year mortgage, have a lower interest rate, but have higher monthly payments. Longer-term loans, like 30-year mortgages, have a higher rate but lower monthly payments. Short-term loans generally cost less in total interest.

Mortgage interest rates are determined by many factors, including your credit score. If you have a higher score, you are much more likely to get a favorable rate.

How does mortgage interest work?

Your mortgage interest is a percentage of your balance. As you pay off your mortgage, you will make monthly payments based on your loan amortization schedule. As your loan matures, more of your payment goes towards the principal or the actual amount you borrowed. Initially, more of your payment goes to interest.

Say you have a 30 year fixed rate mortgage with a balance of $ 300,000 and an interest rate of 3.2%.

Your monthly mortgage payment (principal and interest) would remain at $ 1,297 for the entire 30-year term, but for your first payment, $ 497 of that amount would be applied to principal and $ 800 to interest. Around year 15, these proportions change: $ 824 of your payment would be applied to principal and $ 477 to interest. You will continue to pay more in principal and less in interest until the loan is fully paid off.

Suppose, however, that you have chosen another mortgage lender and your rate is now 3.5%. You would pay $ 1,347 per month for principal and interest, $ 50 more per month compared to the example above. You would also pay around $ 185,000 in interest over the course of the loan, which is almost $ 18,000 more than if you had the lowest rate.

APR vs interest rate

The APR, or Annual Percentage Rate, takes into account both your mortgage interest rate and other costs, including lender fees and discount points. The APR is also expressed as a percentage, but because it includes these other fees, it is always higher than the interest rate.

The interest rate, on the other hand, can be fixed or adjustable and only reflects the cost of borrowing the loan.

By law, lenders must disclose the APR for a given loan so that borrowers have accurate cost information up front.

APRs differ from lender to lender, so it’s important to ask yourself what the APR includes. Some APRs do not include credit report or appraisal fees, for example.

What are the current mortgage rates?

Currently, the 30-year fixed-rate benchmark mortgage is 3.060%, according to Bankrate’s latest lender survey. Mortgage rates have risen slightly lately, but remain at historically low levels.

With Bankrate, you can compare current 30-year mortgage rates and other types of loans.

What is a good mortgage rate?

Mortgage rates fluctuate frequently, so what is considered “good” changes over time. While it is a good idea to compare mortgage rates online, you will also need to compare quotes specifically tailored to your situation in order to find a good rate. A rule of thumb is to get at least three offers so you know what rates are available based on your credit and financial profile.

How to get the best mortgage rate

To get the best chance of getting the lowest mortgage rate, follow these tips:

  • Improve Your Credit Score – Lenders offer their lowest rates to those with high credit. Some ways to increase your score include paying your bills on time and reducing your credit utilization ratio, the ratio of your credit balance to your credit limit.
  • Create a record of your work history – Lenders generally look favorably on borrowers with at least two years of regular employment. If you have significant gaps in your employment history or are self-employed, you may need to provide more paperwork to get approved for the best possible rate.
  • Save more for a down payment – Putting more money up front can help you get a lower rate. One way to increase your savings is to automatically set aside a portion of your income in a savings account. You can also look into down payment assistance programs, which can help you get the funds you need.
  • Compare rates – Comparing offers to find the lowest mortgage rate can save you thousands on a 30 year loan.
  • Consider a low credit mortgage – If your credit score is not as high as you would like, consider getting an FHA loan. FHA loans can sometimes have a lower interest rate, by about half a point or more, compared to a conventional loan.
  • Work with a mortgage broker – A broker can help you find the best deal and negotiate a lower rate, and many charge no fees. Make sure you look for a broker who is experienced with the type of loan you are looking for.

At the end of the line

Your mortgage interest rate affects how much you will pay for your home loan, both on a monthly basis and overall. This is why it is crucial to get the lowest rate possible. Some of the best ways to do this are to compare rates regularly, increase your credit score, and consider working with a mortgage broker to find the best deals.

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