How Is My Mortgage Interest Rate Determined
Lenders determine your mortgage interest rate based on the type of loan you take out, your credit score, and the overall loan amount, as well as your down payment amount and the length of the loan.
- Loan Type: Government-backed loans are handled differently than conventional loans.
- : People with high credit scores generally receive lower interest rates. Although those with lower credit scores may still qualify, their mortgage terms may not be as favorable.
- Loan Amount: Your mortgage rate will be influenced by the total amount of money you need to borrow. Higher amounts tend to suggest higher interest rates.
- Down Payment Amount: A higher down payment can significantly lower your interest rate.
- Length of Loan: Long-term loans tend to bring lower monthly payments with higher interest rates, while short-term loans bring higher monthly payments and lower interest rates.
Should You Buy Mortgage Points
Many lenders sell mortgage points . Buying points means youâd pay more up front to lower your mortgage rate which could save you money long-term. A mortgage discount point normally costs 1% of your loan amount and could shave 0.25% off your interest rate.
With a $200,000 mortgage loan, a point would cost $2,000. Buying two points would cost $4,000 which would be due, in cash, when you close the loan. These two discount points would translate into a 0.5% reduction to your interest rate.
Discount points could pay off but only if you keep the home loan long enough. Selling the home or refinancing the mortgage within a couple of years would short circuit the discount point strategy. But if you stayed in the loan indefinitely, you’d reach a break-even point after which the discount points would save you more and more over time.
Often, spending cash on a down payment instead of discount points saves more unless you know for sure you’re keeping the loan for years. If a larger down payment could help you avoid paying PMI premiums, put the money toward your down payment instead of discount points.
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How Does A Repayment Mortgage Work
With a capital repayment mortgage, your monthly repayments are calculated so you’ll have repaid all the debt and the interest over the term you agree . It means your monthly payments both cover the interest and chip away at the actual debt, so at the end you owe nowt.
This has a strange effect. In the early years, your outstanding debt is larger so most of your monthly repayments go towards paying the interest. Gradually, as you reduce what you owe, most of your repayments go towards paying off the debt.
For example, on a £150,000, 25-year mortgage at 3%, you’ll pay £711 a month. After 10 years you’ll have made £85,320 in payments, but only reduced what you owe by £47,000. Yet after a further 10 years, having paid another £85,320, you’ve reduced the debt by a further £63,420. This is because less interest is accruing each year.
Many people, once they realise this, then worry that if they ever remortgage to another deal, they’ll lose all the work they’ve put into decreasing what they owe. This isn’t true. Provided you keep the same debt and the same number of years left until it ends it stays the same.
To see how your repayments would work in practice, check out our Mortgage Calculator.
When Should I Lock In My Mortgage Rate
Its impossible to know what direction mortgage rates will go from day to day. Thats why a mortgage rate lock is such a useful tool because it protects you if rates go up. And with interest rates so low right now, you should lock in your rate as soon as you can.
When you lock in your rate, ask your lender how long the lock is valid for. A rate lock can be good for anywhere from 30 to 60 days, which typically will give you enough time to close before the lock expires. If something happens where you need to extend your rate lock, ask about fees as many lenders charge a fee for extending a rate lock.
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How Does An Interest
Interest-only mortgages used to be really popular among first-time buyers, but since the 2008 credit crunch it’s been difficult to get your hands on one. And laws which came into effect in 2014 mean interest-only mortgages will only be offered where there’s a credible plan to repay the capital, making them even rarer.
Here’s how they work in brief:
- With an interest-only mortgage you just pay the interest during the term. Your monthly payment doesn’t chip away at your actual debt it just covers the cost of borrowing that money. So for example, when the term is up on a £150,000 mortgage, you would still owe £150,000.
- You have to pay back the amount you borrowed in one lump sum at the end of the mortgage term. So if you get an interest-only mortgage, you NEED to have a separate plan to pay off your debt.
If you’re considering an interest-only mortgage, the lender will want to see evidence of a convincing method you’ve set up to build up enough cash to pay off the actual cost of the property.
What Are Todays Rates
Mortgage rates are low even if you live in an area with higher-than-average rates. Rate differences between states and cities can be compensated for by shopping around and getting 3 to 4 quotes from various lenders.
Get a quote for your home loan now. You dont need any documentation to start the process, and you can have a quote in minutes.
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How Often Does A Variable Rate Change
All variable rates are subject to reset to the market-based index rate at a predetermined frequency. How often the rate on your variable rate loan will change depends on the frequency you choose. Here are your frequency options:
- Yearly-Variable As the name suggests, a yearly variable rate changes to the market-based index once per year. It has these characteristics:
- Offers protection against steep and rapid rate changes.
- Offers lower principle limits.
- Rate changes may be no more or less than 2% at each yearly adjustment.
- The potential changes in interest rate over the life of the loan are typically capped at a 5%.
- Yearly variable rates are preferred by those borrowers who anticipate sharp or frequent increases in rates over the coming years.
Factor: Your Property Type
Youll generally get better mortgage rates if you live in the property being financed. Non-owner-occupied properties, for example, tend to have higher rates due to the added risk to the lender. Thats especially true if theyre rented out.
As well, properties that are less liquid rarely qualify for the lowest rates due to potential resale risk if a customer defaults.
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And How Do Investors Determine How Much The Rate Of Inflation Will Be
Investors have certain expectations of inflation. And that expectation is typically linked with the rate of economic growth in a country
For countries like the US, Japan and Germany, that are fairly well developed, those rates of economic growth are not that high. Citizens of these countries already own a lot of what they need, to live comfortably. So they dont end up buying a lot more every year.
On the other hand, for developing countries like China and India, where economies are expected to expand a lot more in the coming years, there is more expectation of growth. A large fraction of the population dont already own what they need, to have good lifestyles. So there is significantly more scope for economic activity and growth. As a result, rates of inflation in these countries are higher.
How Are Mortgage Interest Rates Set
Mortgage rates tend to rise when the countrys overall economic outlook is positive. In those times, more people want to buy homes and borrow money, so lenders can charge higher rates. When economic growth slows and unemployment rises, consumers need more encouragement to take out home loans, so mortgage rates tend to fall. The Federal Reserve, America’s central bank, helps set short-term interest rates. Mortgage rates are influenced by the same economic conditions and will often move the same way as the Feds benchmark rate, even though theres no direct connection.
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What If I Want To Buy With A Friend
Some friends or siblings club together to buy a property normally lenders allow up to four people to get a joint mortgage. Pooled salaries will increase your buying power, but remember you are jointly and severally liable for the mortgage.
You need to consider what would happen if one of you wanted to sell your share or lost your job. The lender won’t care if three out of four of you paid your share. It’ll want its money and will pursue all of you for the debt. In reality, it’s likely to put more effort into chasing the person who is still working than the person who isn’t.
Buying with other people isn’t something to be taken on lightly. Once you take on a mortgage together you’re financially linked your friend’s credit rating will now affect yours and even a partial missed payment will go on all your credit files. Don’t do this without sorting a legal contract between you covering all the ‘what if’ possibilities and what your rights are.
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Why Are Mortgage Rates Different
Mortgage rate Q& A: Why are mortgage rates different?
Why is the sky blue? Why are clouds white? Why wont your neighbor trim their tree branches?
These are all good questions, and ones that often puzzle even the most savvy of human beings.
First things first, take a look at how mortgage rates are determined to better understand how banks and mortgage lenders come up with interest rates to begin with.
From there, youll need to consider why mortgage rates are different for consumer A vs. consumer B.
Business Costs And Competition Affect Your Final Rate
Answering the question what are todays rates? is not as simple as it sounds.
Rates vary by the hour, and by the applicant. A mortgage rate and fee structure is almost as unique as a fingerprint.
But those arent the only factors that affect rates. Where you live also matters.
Mortgage rates and costs vary between states, and even multi-state lenders dont quote the same rate and closing costs everywhere they lend. The cost of doing business and even competition among lenders play into the final rate on your mortgage.
Fortunately, local factors dont affect rates as much as macro forces things that set rate levels on a national level. You wouldnt get a 5% mortgage in New York City and 3.5% in Dallas, Texas, for instance.
And by shopping around, you can find a competitive rate no matter where you live.
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Which Loan Rate Do I Choose
When choosing between a variable and fixed-rate mortgage, you must consider a number of personal and economic factors to see which of the two works best for you. If interest rates are fairly low and you dont expect it to fall further during your loan term then locking in a fixed rate is advisable. On the other hand, if you expect the rates to fall, a variable rate may be more preferable. However, do not forget that no one can 100% accurately predict how mortgage rates will change over time so be wary of the information you get.
Aside from economic factors, you must also consider your own financial situation. Are you able to afford a sudden rise in payments if interest inflates? If not, the stability of a fixed rate will suit your needs more. However, if you are able to keep up with sudden changes, a variable rate may be worth it for the potential drops in interest.
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Open Vs Closed Mortgages
You may often notice a significant difference in mortgage rates betweenopen and closed mortgages. Open mortgages allow you to make principal prepayments at any time without any charges or penalties, which makes it very flexible. This flexibility is counterbalanced by open mortgage rates being higher than closed mortgage rates.
Choosing a closed mortgage can let you access much lower mortgage rates at the risk of prepayment penalties if you go over your lenders annual prepayment limit. Things like selling your home or a mortgage refinance can cause you to have to pay significant prepayment penalties. This could be avoided with an open mortgage, but youll have to pay a higher mortgage rate.
What Term Should I Choose
The most common term length in Canada is 5 years. Unless you have specific concerns, a 5-year term generally works well. Longer terms will have higher mortgage rates, which can be bad for those struggling to pass themortgage stress testas you may be tested at a higher mortgage rate. This is a particularly significant issue for homebuyers inTorontos housing marketor inVancouvers housing market. However, you wont have to worry about requalifying for a mortgage as often as a short mortgage term. Each lender will offer different options for term length and rates contact your lender or broker for more details.
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How Do I Get A Mortgage With One Of The Big Banks
There are two ways to apply for a mortgage with one of the big banks. You can either go directly to a particular bank, or you can apply through a mortgage broker. Using a mortgage broker gives you the added benefit of being able to compare mortgage rates and products between different lenders, as well as the chance to speak to an independent mortgage expert.
A Moneywise Study Finds In Some States Closing Costs Can Be Shockingly High
Buying a home is typically the largest purchase a person will ever make. And, the cost of buying doesn’t stop at the purchase price. Closing on a home particularly when you’re taking out a mortgage can be expensive. What you’ll pay for an appraisal, lender fees, taxes and other closing costs vary wildly by state, a MoneyWise analysis shows. Whether you’re buying in your hometown or moving cross country maybe because you can now work from home, anywhere you’ll want to start by knowing roughly how much closing costs will set you back in the state where youre buying.
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When You Can And Cant Negotiate Your Mortgage Rate
In many cases, a lender cant give you a better deal than they give another similar borrower. That would be considered discriminating against the other borrower.
However, there issome room for negotiation.
For example, lenders are allowed to credit closing costs to a borrower when delays result in a blown rate lock, or when its necessary to be competitive if rates suddenly fall.
The big caveat, though, is that the loan officers commissionable income must not be affected by the negotiations.
A successful mortgage rate negotiation reduces income to the lender, therefore, but never to the loan officer. This keeps the loan officers interest aligned with the customers, and this is good.
For customers looking for the best possible mortgage rate, then, its always good to ask.
Lenders have less flexibility to change rates or fees, but there are situations when its possible especially when unforeseen events increase your loan closing costs.
