As the spring homebuying season kicks into high gear, you will likely be busy attending open houses, packing and getting everything in order.
In the midst of the buying process, you might overlook a few details that, when examined later, could come as a shock to you. One of these surprises could be the interest rate of your mortgage.
Before you sign on the dotted lines, it's important that you understand some of the key factors that will influence the interest rate on your mortgage.
No. 1: Your credit score
This three-digit number is arguably one of the most important in your life. Based on your prior history of borrowing credit, paying back bills, loans and more, your credit score will dictate whether you are eligible for a low interest rate.
According to FICO, which is used by a vast majority of financial institutions, the average credit score as of April 2015 is 695, which is defined as being in a good credit score range.
When your score is higher, it represents to lenders that you are a reliable borrower by making all of your monthly payments on time and using your credit in a restrained manner. If your score is less than optimal, be prepared to pay more in interest.
No. 2: Your down payment
Generally speaking, you should seek to put down at least 20 percent of the home's sticker price. The higher your down payment, the lower the interest rate, stated the Consumer Financial Protection Bureau.
While it's not completely necessary to put forth a 20 percent down payment, you will benefit by doing so, or coming as close as possible. Keep in mind that it's entirely possible to still secure a mortgage if you don't have a high down payment.
No. 3: Specifics of the loan
The type of loan you get, as well as the number of years, will influence the rate on your mortgage. For example, 15-year mortgages will come with lower interest rates, but higher monthly payments.
Likewise, the type of loan you have will also be a key factor. There are two types of mortgages you can opt for: fixed-rate or adjustable. If you get an ARM, rates might be low at first, but once the locked-in period ends, rates can either increase or decrease depending on market conditions. On the other hand, a FRM has the same interest rate for the duration of the loan.
Furthermore, rates will also vary depending on the category your loan is in. You can either get a conventional mortgage, or one from the Federal Housing Authority or the U.S. Department of Veterans Affairs. Because each loan type differs, you should expect different interest rates.
No. 4: Monetary policy
The U.S. Federal Reserve has a large influence on the nation's economy, partly due to its ability to indirectly influence interest rates.
For example, when the Fed decides to increase or lower its benchmark interest rates, potential homebuyers can expect the move to be reflected in mortgages some time later. The last time rates were hiked was in December 2015, but the Fed has hinted at future hikes.
Buyers looking to purchase a home in the near future will benefit by knowing what factors will influence the interest rate on their mortgage.
For more information about smart ways to manage your finances, contact Landmark Bank.
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