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Understand Your Mortgage Interest Rate

Brandon Kappel / January 25th, 2018

If you’re like most people, you want to get the lowest interest rate for your mortgage loan. It can be difficult to figure out, but knowing what factors determine your mortgage interest can help you prepare for the homebuying process.

The Consumer Financial Protection Bureau (CFPB) says “even saving a fraction of a percent on your interest rate can save you thousands of dollars over the life of your mortgage loan.” Do your homework and shop around to compare rates from different lenders. Understand a few of the factors they look at to determine your rate beyond credit history.

Home Location: Lenders will often offer different interest rates depending on what state or county you live in. To get accurate estimates on interest rates in your state and county, use this CFPB tool to explore interest rates depending on your loan amount and type.

Down Payment: A larger down payment usually leads to a lower interest rate. Lenders assume less risk if a home buyer has more money invested in the property. If you can comfortably put down 20 percent or more, do it.  You’ll usually get a lower interest rate and pay less over the course of the mortgage.

Loan Term: The duration of a loan will also determine the interest rates that will be paid. Shorter term loans will generally have lower interest rates and lower overall costs, but higher monthly payments. The specifics of how much interest you will pay over the life of the loan versus monthly payments will ultimately depend on the loan’s length and interest rate. Learn more and try out different choices with the explore interest rates tool from CFPB.

Loan Type: Some borrowers may qualify from loan programs through the Federal Housing Authority (FHA), U.S. Department of Agriculture (USDA), or Veterans Affairs (VA).  Qualifying for any of these programs may affect your mortgage eligibility, down payment, interest rates, and other costs.

Interest Rate Type: Mortgages have adjustable or fixed interest rates.  Monthly payments remain the same over the life of a fixed rate mortgage.  Adjustable rate mortgages usually have lower initial interest rates; but interest rates are subject to change based on the market.

Points: Mortgage points, also known as discount points, are upfront costs paid directly to the lender in exchange for a lower interest rate.  Paying for points is often a good choice for people who plan to live in their property for a long time.

Although these are not the only factors in determining your mortgage’s interest rate, they might be some of the factors you may not expect. For a more in depth look at these factors and more, check out the “Seven factors that determine your mortgage interest rate” from CFPB. 



 

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