When you get a mortgage to buy a home, you have to pay back both the amount you borrowed (called the capital) and the interest that covers the cost of the loan. How much interest you pay relies on the size and type of your mortgage, how much you put down, your credit score, and other things you can’t control, like changes in monetary policy, economic growth, and inflation. Let’s look at how mortgage rates work in more detail.
If you want to buy a house, a financial planner can help you make a plan that fits your needs and goals.
What is the rate on a mortgage?
The interest rate that a lender charges for a home loan is called the mortgage rate. This rate decides how much the borrower will pay each month and how much the house will cost in total over the course of the loan. Knowing your mortgage rate will help you make decisions about buying a home, choosing the right mortgage plan, or figuring out the best time to refinance a current mortgage.
When you get a mortgage, your lender will usually give you at least 80% of your home’s value, which you agree to pay back with interest over a certain amount of time. This time can be as short as 10 years, but it can also be 15, 30, or even 40 years.
Let’s look at a $200,000 30-year mortgage with a 20% down payment and a 3% interest rate, the total amount of interest paid over the life of the loan would be $82,714. But if that rate goes up to 4%, you would have to pay interest of $114,796. So, if your mortgage goes up by just 1%, it will cost you just over $30,000.
Choosing between fixed and variable mortgage rates
There are two main kinds of mortgage rates: fixed and changeable. Let’s look at how they are different:
Rates that don’t change. These loans have rates that don’t change over the course of the loan’s term. Because of this, your regular payments will stay the same as well. Terms can range from 10 to 40 years, with shorter terms usually needing bigger monthly payments at lower interest rates.
Mortgage rates that change. On the other hand, these change with how the market is doing. Since your interest rate isn’t fixed, so is your weekly payment. With many of these loans, the amount your interest can change is limited. And if your interest rate goes up or down, your mortgage lender will change the amount you pay each month.
How interest rates on home loans affect the economy
Your mortgage rates can be affected by how the Federal Reserve handles money. For example, when the economy isn’t doing well, the government may decide to lower interest rates to get growth going again. And as a result, this can lead to lower mortgage rates, which can help renters and people who already own a home save money.
But lowering rates can also cause inflation, which can hurt the health of the business as a whole. This could cause the Federal Reserve to raise interest rates to slow down the economy. The rate you pay on your mortgage will also go up if interest rates go up.
How the rates on mortgages are set
The rate on your mortgage can change based on these four usual things:
1. Score of credit: Whether or not you can get a mortgage will depend on your credit score. And if your score is higher, you might be able to get better terms and a lower rate of interest.
2. Down payment: Usually, if you put more money down at the start, you’ll get a better credit rate. If you can’t afford to put 20% down, your lender may make you get mortgage insurance, which could raise your rate or add to your monthly payments.
3. Length of the loan: The length of a mortgage can be anywhere from 10 to 40 years. Loans with shorter terms usually have lower interest rates but higher monthly payments.
4. Type of loan: Rates can be very different based on the type of loan you get. So, you should talk to more than one lender to fully understand all of your choices.
In conclusion
When you’re looking for a mortgage, you should think about how much interest you’ll have to pay. A difference of just 1% can cost you thousands of dollars over the life of your loan. When making a plan to buy a home, you should also look at the type of mortgage rate and loan, as well as the terms and other factors.
