Interest Rates and Mortgages: How One Affects the Other
When you borrow money for a mortgage, one of the things that will come up is the interest rate. Interest rates can impact your monthly mortgage payment and, subsequently, how much money you have each month to pay bills, buy food, travel, and pay for entertainment. Understanding interest rates, how they affect your monthly mortgage payment, and what you can do to keep your interest rates low can help you enjoy a better quality of life. Keep reading to learn about the relationship between interest rates and your mortgage.
How Does Interest Affect Your Monthly Mortgage Payment?
When you pay your mortgage each month, some money is applied to the principal balance, and some is applied to the interest. You'll be required to pay back your mortgage in a certain period, so the higher your interest rate, the more money you'll have to pay each month. The best way to keep your payments affordable, aside from borrowing less money, is to keep the interest rate low.
How Much Difference Can a Few Points Make?
The difference between 2.7% and 3.1% interest may not sound like much, but in reality, even a small change can make a big difference. A few tenths of a point can translate to thousands of additional dollars spent in interest each year. Since this raises the overall monthly payment, this means that people who have a high-interest rate on their mortgage may have a more challenging time saving money.
Want Lower Interest Rates? Here's What You Can Do
Generally speaking, the people who have better credit and who can pay more for their down payment will enjoy lower interest rates when they take out their mortgage. If you're thinking about buying a home soon, you can get lower interest rates by researching down payment options, getting a credit report, and improving your overall credit. To improve your credit:
- Pay your bills on time.
- Fix any errors on your credit report.
- Pay down debts.
- Avoid carrying high balances on your credit cards.
- Limit the number of credit cards you're paying down.
The longer your credit history and the better you are at paying your bills, the better your credit will be. To find out more about how you can improve your credit, talk to a financial planner. Your financial planner can help you manage your money and create a budget that will make it easier to save, easier to pay bills, and easier to avoid large debts.
Frequently Asked Questions About Mortgage Rates
Mortgages and interest rates are topics that could be discussed endlessly. Here are the answers to a few FAQs about interest rates.
How Are Interest Rates Determined?
Interest rates are set by a number of different organizations, including the Federal Reserve. The Federal Reserve uses a number of factors to determine what the interest rate should be, including the state of the economy and how much money is being borrowed. The Federal Reserve also looks at what other banks are doing in order to get an idea of where interest rates should be.
Should I Wait to Buy a Home If Interest Rates Are High?
Waiting to buy a home until interest rates drop may be the best option for some people, but it's not the only factor to consider. The decision to buy a home should also take into account things like your overall financial stability, job security, and credit score.
If you're worried about interest rates going up even more, or if you think they may stay high for a while, waiting may be a good idea. Keep in mind, though, that there are still personal factors that determine your rate.
Are Interest Rates The Same For Every Type of Loan?
When you're looking to buy a home, you'll likely come across a few different types of mortgages. What homebuyers need to know about conventional mortgages is that not all interest rates are the same. Here's a look at some of the most common types of mortgages:
Fixed-Rate Mortgages. A fixed-rate mortgage is one in which the interest rate stays the same for the entire life of the loan. This type of mortgage is popular because it offers stability and predictability. Your monthly payments will be the same each month, making it easier to budget for your home. They can last 15 years or 30 years. They're ideal when Federal interest rates are low but less optimal during periods of higher rates.
Adjustable-Rate Mortgages. An adjustable-rate mortgage (ARM) is one in which the interest rate can change over time. This type of mortgage is riskier for the borrower, as the interest rate can go up or down, making the monthly payments more or less expensive. ARMs are popular because they offer lower interest rates than fixed-rate mortgages in the beginning and can be refinanced for better rates down the line.
Be Proactive to Get the Best Interest Rates on Mortgages
A good lender should be able to answer your questions about interest rates, your credit history, and how the interest rates impact your monthly mortgage payment. Your lender can also help you find ways to save money on your mortgage to make it more affordable.
You can also save money on your mortgage payment by purchasing a lower-priced home. Sometimes this is done by purchasing a more affordable house; other times this is done by negotiating a lower price for the home you want. People have more control over interest rates than they realize. For the best rates, make a financial plan, optimize credit scores, and work with the best lenders available. The process takes time, but it's worth it in the long run.