Mortgage Interest Rates
Obviously you want to keep your interest rate as low as possible. The lower your rate the more buying power you have. When shopping around for a mortgage, keep a close eye on interest rates. The interest rate on your loan will have a major impact on your monthly payment. Even small differences in rates can have a large impact over the life of the loan.
There are several factors that will affect the interest rate of your mortgage. Some are completely out of your control, while others you can be controlled.
In the United States, interest rates are controlled by the Federal Reserve (The Fed). The Fed adjusts interest rates up or down in an effort to keep the economy strong and to keep inflation down. Rate adjustments done by the Fed are out of our hands, so there's no sense worrying about it.
Instead, focus on factors that are in your control. Decide whether you want a fixed-rate mortgage or an adjustable rate mortgage (ARM). An ARM will have a lower interest rate to start, but it will rise or fall as the Fed makes adjustments. A fixed rate mortgage will have a slightly higher rate, but you will be protected against interest rate hikes.
You can also pay discount points in order to lower the interest rate. One point is equal to 1 percent of the amount borrowed. If you were borrowing $200,000, one point would cost you $2,000.
The discount you receive varies from lender to lender, but it is usually about a quarter of a percentage point for every discount point you pay. For example, if you paid one discount point your rate would be lowered from 6.75 to 6.50 percent.
Before you rush to pay discount points to lower your interest rate, you should consider how long you plan to live in the home. Run the numbers both with and without the points to see which gives you the better deal.
Another option you have is to choose a shorter term. A fifteen year mortgage will have a lower rate than a thirty year mortgage. Of course the payments will still be higher because you are paying it back over a much shorter term.
When shopping for a mortgage, the best thing you can do to keep your rate down is to stay on top of your credit report. The higher your credit score the better interest rate you can qualify for. So get a copy of your credit report and check it for errors. Fix any mistakes and work on cleaning up any possible black marks. Be sure to pay your bills on time. A few late or missed payments can have a major impact on your credit score and also on your interest rate.
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