Factors That Affect Mortgage Interest Rates

A mortgage interest rate decliningThe interest rate on your mortgage contributes significantly to the overall cost of your home. It is for this reason that a majority of people go for the lowest interest rate available in the market.

However, even for the savviest of mortgage shoppers, it is difficult to determine the factors that control the mortgage rates. Besides factors such as inflation, economic growth, and the bond market, here are other factors that determine how much you will pay for your home mortgage:

Down payment or mortgage insurance

A larger down payment translates to a lower interest rate. This is because lenders have a lesser risk level when you have a larger stake in your property. Therefore, it is recommended that you secure a down payment of at least 20% or more to get a low-interest rate. If you cannot, you can opt for mortgage insurance. This will protect your lender,, for instance, in case you are unable to pay the loan. As a result, the lender will lower the interest rate since the risk level is not very high.

Loan term

Short-term loans have higher monthly repayments but with low-interest rates and low overall costs. However, it is critical that you pay attention to the specifics. For instance, by how much will the rate be lower compared to a long-term loan of the same amount, and how much more will you be needed to pay monthly? The answers will help you determine the interest rate that you will go for.

Loan type

There are various categories of mortgage loans ranging from VA, USDA, conventional and FHA. Lenders choose which products to offer since different loans have different eligibility requirements. The interest rates paid on each of these loan categories varies significantly. Therefore, talk to multiple lenders to know your options.

It is not one factor, but rather a combination of factors that determines your interest rate. Since everybody’s situation is different, it is important that you consult with an expert before you make a decision.

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