When it comes to buying a home, one of your top priorities will be to find a mortgage and a competitive rate. Last December, The Fed raised interest rates after a historical low. Many people said this would cause mortgage rates to rise as well, even though mortgage and interest rates are not directly related. Depending on the circumstances, you’ll be paying off your mortgage for the next 15 to 30 years, so it is probably best to understand how mortgage rates work.
There are two different types of interest rates for mortgages used by the loan company. The first is the traditional “interest rate” and the other is APR (annual percentage rate). The APR shows you your interest rate after the initial loan fees, application fees, and prepaid interest, that’s why the APR is usually more than the original interest rate stated. You can use the APR to compare loans and find the best possible interest rates.
When you begin calculating your monthly housing payments you have to remember all the fees, because they’ll add up and throw off your budgeting. Many mortgage companies nowadays, won’t even consider you for a loan if you do not have homeowner’s insurance already lined up. The cost of your insurance plus real estate taxes will be put into the same account and added to your monthly payments. To begin calculating your monthly payments, you need to know your interest rate. Interest rates are computed monthly on most mortgages, so once you find your interest rate, divide it by 12 to get your monthly interest rate. There are many tools online that can help you calculate your monthly payments, including your principal, interest, taxes, and insurance.
When it comes to fixed interest versus adjustable-rate mortgage, there are a few things you should know. Every time interest rates go up or down, your lender will recalculate your payments accordingly. So that means when interest rates go up, so do your payments, but when they go down, your payments will follow. Fixed interest, on the other hand, stays the same regardless if interest rates go up or down. Adjustable-rate mortgages are a bit riskier, so take caution and do some research.
A few factors that determine your interest rate will be your credit history, your down payment, and the current housing market. The better your credit score and credit history are, the better your interest rate will be. That is why it is important to build a solid credit score before you begin the home buying process. As for your down payment, 20 percent is the standard, but many lenders nowadays are accepting as low as 3 percent. This is helpful for those who may not be able to afford 20 percent of the principal, but the bigger your down payment the better your interest rate will be.
