What Actually Determines Your Mortgage Rate

There’s lots of commentary about impact when the Federal Reserve raises the federal funds rate. (That’s the amount banks charge each other for short term loans.)

Even though the rate has very little to do with mortgage interest, it often becomes a point for discussion, which can illustrate how much he “experts” actually don’t know about the subject.

So, here are the four items that do impact your mortgage interest rate.

Your Credit Score

Credit scores can play a big role in your mortgage rate. Freddie Mac explains: “When you build and maintain strong credit, mortgage lenders have greater confidence when qualifying you for a mortgage because they see that you’ve paid back your loans as agreed and used your credit wisely. Strong credit also means your lender is more apt to approve you for a mortgage that has more favorable terms and a lower interest rate.”

That’s why it’s important to maintain a good credit score. If you want to focus on improving yours, a trusted financial advisor can give you expert advice.

Your Loan Type

There are many types of loans, each offering different terms for qualified buyers. The Consumer Financial Protection Bureau (CFPB) says: “There are several broad categories of mortgage loans, such as conventional, FHA, USDA, and VA loans. Lenders decide which products to offer, and loan types have different eligibility requirements. Rates can be significantly different depending on what loan type you choose.”

When working with your real estate advisor, make sure you know which types of loans you may qualify for as it may influence the kind of property you can purchase.

Your Loan Term

Another factor to consider is the term of your loan. Just like with location and loan types, you have options. Freddie Mac says: “When choosing the right home loan for you, it’s important to consider the loan term, which is the length of time it will take you to repay your loan before you fully own your home. Your loan term will affect your interest rate, monthly payment, and the total amount of interest you will pay over the life of the loan.”

Depending on your situation, the length of your loan can also change your mortgage rate.

Your Down Payment

If you’re a current homeowner looking to sell and make a move, then you can use the home equity you’ve built over time toward the down payment on your next home. The CFPB explains: In general, a larger down payment means a lower interest rate, because lenders see a lower level of risk when you have more stake in the property. So if you can comfortably put 20 percent or more down, do it—you’ll usually get a lower interest rate.”

To learn more, connect with a lender to find out the difference a higher down payment can make for your new mortgage.

Bottom Line

These are the major factors that can help determine your mortgage rate, if you’re buying a home. It’s important to work with a reputable lender, who can pre-approve you and give you honest advice about interest rates now and what can be expected in the future.

If you are looking for a lender, we work with several, who we can highly recommend. Let’s connect at 508-360-5664 or msennott@todayrealestate.com and we’ll pass along their contact information.

Knowing what you can afford then helps us locate the homes that fit your budget. And we’ll be sure that you stay in touch with your lender in case a rate change impacts what you can afford.

Let’s talk soon…

Mari and Hank

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