The home-purchase process is one that many prospective home buyers find confusing. There are lots of details to keep straight when you’re looking at new homes, and soon all the particulars start to run together. It can be challenging to remember which house had the features you liked best, and after you’ve looked at several of them, it’s easy to feel overloaded. A good real estate agent can help you keep everything straight and help you make a list of the features you liked best in each home, which helps when it’s time to make your final decision.
Applying for a Mortgage Can Also Be Confusing
The same can happen when it’s time to apply for a mortgage. As you get into the loan application process, you suddenly realize that many things impact your future monthly house payment. The term of your loan and the down payment amount have an impact, but so does the mortgage interest rate. And to make matters more complicated, several factors can impact that interest rate. Working with one of the professional St. Louis mortgage lenders in town – like Homestead Financial Mortgage – can help you navigate the minutiae involved in getting a home loan and help you get the best terms possible on your mortgage.
Here are a few of the factors that can have an impact on the interest rate for mortgage loans. Get familiar with these so that you can ask intelligent questions when working with your loan officer. An educated buyer is a smart buyer.
Factors that Influence Mortgage Interest Rates
Building type. The type of building you’re purchasing affects your interest rate. Many St. Louis mortgage lenders follow guidelines that set the interest rates on home loans based on the probability associated with the risk of default on that type of property loan. If you’re looking for a new home, you’ll be purchasing a single-family dwelling which has one of the lowest default rates of all mortgage loans. This works in your favor because it means lower interest rates, putting you at an advantage going into the home-buying process.
Down payment amount. The size of your down payment can also impact your mortgage interest rate. The more cash you can put down, the less money you have to borrow. And the less you borrow, the lower your loan-to-value ratio. This reduces the risk to your St. Louis mortgage lender, which means they’re more apt to loan you the money to buy your home at a lower interest rate. It’s kind of like they’re rewarding you for borrowing less by lending you the money at a lower rate.
Credit score. Credit scores also play a role in fluctuating interest rates when it comes to home loans. Generally, the higher your credit score, the lower the interest rate you’ll qualify for. A high credit score tells mortgage lenders that you’re a reasonable risk, and they can be fairly certain that if they loan you money to buy a house, you’ll pay it back according to the loan contract. Those with lower credit scores are assumed to be a higher risk, so they end up paying more in interest. Before you start the mortgage loan application process, get a copy of your credit report, and make sure it includes your credit score. Lenders like to see scores in the 600 – 700 range. These are the customers who usually qualify for the lowest mortgage interest rates.
Amount of the loan. The amount of money you’re borrowing has an impact on your mortgage interest rate, too. Larger loans are considered riskier because they’re well…larger. There’s more money involved, so mortgage lenders have to put a premium on it in the form of higher interest rates. The more you need to borrow for your new home, the higher the interest rate is likely to be, unless you can put down a sizable down payment. Save up your money, and make as big a down payment as possible. You’ll thank yourself for it later.
Points or no points. When you go to close your loan, you’ll probably pay points. Points are also called discount points. These points give you a way to lower your monthly mortgage payment by paying more in closing costs upfront. One mortgage point typically costs 1% of the loan amount and reduces your interest rate by 0.25%. So the more you pay in points, the less you pay in interest.
Here’s a quick example:
Let’s say you’re borrowing $300,000 to buy a home. The loan is quoted to you at 4% interest. If you want to lower your interest rate (and, ultimately, the total you pay over the life of the loan), you can buy down your interest rate by paying $3,000 extra at closing. This would result in a mortgage interest rate of 3.75% instead of 4%. While this would result in lowering your monthly payment by only $43, over the life of the loan, you’d save $15,444 in interest.
Other Factors
Of course, there are other factors that may impact the mortgage interest rate on home loans. The state of the economy has a significant impact, as does the political climate. The actions of the Federal Reserve from one day to the next can also impact interest rates. The best thing to do is to lock in your interest rate as soon as you can. That will protect you from some of the ups and downs caused by outside influences.
Confused Yet?
If all these numbers make your head spin, it’s probably time to get St. Louis mortgage experts involved to help out. Homestead Financial Mortgage is a St. Louis mortgage lender with the knowledge and experience to help you work through the confusion of getting a home loan. We have a branch in St. Louis for your convenience, but we also have branches in Overland Park, Kansas, and Glen Carbon and Godfrey, Illinois. We’re happy to answer any questions you may have about the home-buying process or fluctuating interest rates. Stop in and see us today!