If you’re researching mortgages, you know that they come with interest rates. What exactly is a mortgage interest rate, and how much does it impact your buying power? What can you do to improve the interest rate you’re offered? We answer those questions in this article.
Your mortgage interest rate has a direct impact on how much house you can afford. What exactly is a mortgage interest rate?
A mortgage is a loan, and like other bank loans, it comes with an interest rate – it’s how lenders make enough money to stay in business. This is usually a percentage of the loan amount, and you pay it off alongside the principal. Usually, this makes up your monthly mortgage payment, along with things like private mortgage insurance (PMI), property taxes, and perhaps homeowner insurance.
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As the interest rate is part of your monthly mortgage payment, it directly affects how much of a loan you can afford. Even a small change in your interest rate can add quite a bit. For example, let’s say you bought one of Michigan’s average-priced houses for $210,000.
You managed a 10% down payment and got a conventional 30-year loan. At a 4% interest rate, you’re paying 1,264.40 per month. At 5% interest, this payment increases to $1,376.68. That’s $112 more per month – and 10 more PMI payments.
So, it’s pretty obvious how much your budget is impacted by mortgage interest rates. But what factors affect the interest rates themselves?
Banks calculate interest rates based on many things, including the overall economic and market picture and the qualifications of each prospective borrower. We’ve already talked about factors that influence mortgage interest rates elsewhere in this blog, so let’s just do a quick overview of some of the factors you can influence:
Although a lot has been said about the Federal Reserve rate rising, it’s important to realize that this doesn’t directly affect your mortgage interest rate. (It does affect other types of loans, like credit cards.) However, the Fed is a good indicator of where the economy is heading, so it doesn’t hurt to keep an eye on it.
It’s often a good idea to shop around for your mortgage, comparing offers from several lenders. What can you do if your mortgage interest rate seems a little higher than expected?
You have some options. If you haven’t already done so, improve your financial health by paying off some debt and working on your credit score. You should also check your credit reports at all three major agencies and make sure they’re accurate. If you’ve done this already and the rate is still high, talk with your lender. They may suggest a longer loan term or a different mortgage type. At Mortgage 1, we work with our customers to ensure they get the best deal possible!