The average mortgage interest rate for a 30-year fixed mortgage is at 3.22%, while the average mortgage interest rate for a 15-year fixed mortgage is at 2.45%. Both interest rates have been rising. But, what determines your personal interest rate? How do lenders calculate mortgage interest rates for different people?
Mortgage Matters
There are several factors that go into deciding each person’s mortgage rate. And, it does depend on your past habits. Learning about these factors can help you take control of your future interest rate.
To learn more about mortgage interest rates today and how a lender is going to determine your mortgage interest rate, keep reading.
Credit Score
Your credit score is one of the most influential factors in determining what mortgage rate you get. In general, consumers with higher credit scores get lower interest rates.
So, you should try to raise your credit score to save money on your home loan.
Your credit score is the best way for lenders to determine how reliable you are as a consumer. It lets them know whether or not you’ve made payments to other lenders in the past.
If your credit score is low, that tells lenders that you may not make your payments in full on time. If your credit score is high, that tells lenders that you’ve been making your payments properly.
Therefore, lenders are more likely to give lower interest rates to consumers with high credit scores.
Some lenders are willing to give loans to people with very low credit scores. However, if you do have a horrible credit score, you should consider waiting a few years to better your credit score. With this time, you can lower your debt and raise your score.
Loan Term
The loan is the amount of time that you have to pay back the loan. In general, shorter loan terms mean lower interest rates.
However, loans with shorter terms do have higher monthly payments. Because you have to pay off the same amount of money in a shorter amount of time, you have to pay more per month.
If you can, you should opt for the shorter loan term. You’ll pay less overall and pay it all faster.
If you can’t afford a short-term loan, it’s okay to choose a long-term loan. Just make sure that you take your time to shop around for the best mortgage. You want to find a loan with a lower interest rate and better conditions.
Don’t settle with the first lender that you talk to. Talk with multiple lenders and get quotes from each one. Then, take some time to review the material and pick the right one for you.
Loan Amount
You may have a higher interest rate if your home loan is too large or too small. Usually, mortgage loans include the home price and closing costs (minus the down payment). Some people also include their mortgage insurance.
If you’re borrowing a lot of money in comparison to the home price, the lender may think that you don’t have the liquid assets to pay a proper down payment. This is a red flag that tells them that you may not be able to pay your monthly payments due to a lack of funds.
If you’re borrowing a little bit of money, the lender isn’t going to get much from the deal. So, they’re more likely to charge a higher interest rate so that they can make more money from the exchange.
To get a loan that’s somewhere in the middle, you should make sure that you’re paying a down payment of around 20%.
Down Payment
Generally, a larger down payment means a lower interest rate. By having more stake in the property, you’re showing the lender that you’re a low-risk investment.
If you can put down 20% of the home price, it’ll show the lender that you can afford to put money into the house. In turn, they’ll see that you have liquid assets to spend on owning a home.
Paying a larger down payment is better for you, too. A larger down payment means a lower loan amount. A lower loan amount means a lower total interest cost.
Overall, you’re going to pay less for the home loan. You won’t waste money on paying too much interest. And, you’ll have lower monthly payments.
Loan Type
There are several types of loans that you should consider as you’re shopping around:
- Conventional loans
- FHA loans
- USDA loans
- VA loans
Some loans offer lower interest rates for specific kinds of people. For example, FHA loans for first-time homebuyers offer lower interest rates and lower down payments for individuals who are buying their first home.
There are even loans that have different kinds of interest rates. You can get a fixed or adjustable interest rate with different kinds of loans.
A fixed interest rate doesn’t change over time, while an adjustable interest rate change based on the market. Some adjustable-rate mortgages have a fixed rate for the first few months.
Depending on the market, a fixed-rate mortgage or an adjustable-rate mortgage can be cheaper. Many people evaluate the market before choosing the types of interest rates for their mortgages. That way, they can make an informed decision about the kind of interest rate they’re going to get.
Learn More About Your Mortgage Interest Rate
Each one of these factors is essential in determining your mortgage interest rate. If you feel like you’re lacking in one of these areas, it’s time to rethink your mortgage.
If you can handle a small loan amount and a larger down payment, go for it. If you can afford a shorter loan term, apply for it. Consider different loan types, too. You may be eligible for lower-interest options.
Lastly, you should make sure that your credit score is as high as you can get it. Lower your debt-to-income ratio and get ready for your meeting with the lender.
Feel free to check out the rest of our blog to learn more about your Boston mortgage interest rate and other things you can do to improve your financial health.