No matter how much you love the color blue, you wouldn’t buy a shirt just because it’s the same shade of blue as a robin’s egg. After all, there are other factors that have to be considered (the size, the material, the price, the current contents of your wardrobe, etc.). Letting the mortgage rate be the only factor you consider when selecting a home loan is equally misguided. How are mortgage rates determined? Why do they matter? And what else should factor into your decision-making process?
How Are Mortgage Rates Determined?
As Investopedia explains, a mortgage rate is the rate of interest that borrowers are charged when they take out a home loan. When you borrow money, you pay for the privilege by agreeing to not only pay back what you actually borrowed but also to pay the lender an amount equal to a percentage of the loan in the form of interest.
Interest is a major factor in the cost of borrowing, and it impacts both your monthly payment and the overall cost of your loan. That makes obtaining a low mortgage rate a high priority for many buyers. How are mortgage rates determined? How do lenders decide how much interest to charge borrowers? What else matters when you’re seeking a home loan? Let’s find out . . .
Assembling the Pieces
The Truth About Mortgage makes it clear that there are several pieces that come together to determine your mortgage rate.
Your credit score is a particularly prominent piece of the puzzle. Lenders view prospective borrowers with high credit scores as low risks since they typically have an established history of meeting their financial obligations and handling credit well. So, they reward them with lower interest rates. Lending to borrowers with lower credit scores and shakier credit histories involves more risk, so lenders hedge their bets by charging a higher interest rate. What about your down payment? Again, when borrowers make a sizable down payment, they reduce the lender’s risk. Therefore, borrowers who put more money down may be offered a lower interest rate. The type of property that you’re buying and the kind of loan that you’re seeking also impact the lender’s risk assessment, so they may influence your interest rate.
While you have some control over many of these factors, there’s at least one that’s out of your hands: the economy. A strong economy often results in higher rates. A weakening or slowing economy can cause rates to sink.
What Matters More Than the Mortgage Rate?
Clearly, a low mortgage rate is desirable, but that doesn’t mean that the loan with the lowest interest rate is always the best choice. Mortgages are about more than rates. There are many loan products designed to accommodate the needs of various buyers, and they all have pros and cons. That’s why smart borrowers make it a priority to choose the right loan product for their situation, instead of homing in on interest rates. My Broken Coin suggests borrowers should look beyond the mortgage rate to consider factors like the following:
- Customer Service: The lifespan of a mortgage is typically measured in years, so prioritizing interest rate over customer service can create frustration that lingers for decades. On the other hand, opting for a lender who offers friendly, efficient customer service can help you choose the right loan for your situation and get excellent service now and in the future.
- Terms: Should you opt for the predictability of a fixed-rate loan or gamble on a variable-rate loan in hopes that rates will stay the same or drop? Would you rather pay a little more in interest to have a lower monthly payment and more time to pay back the loan or pay a higher amount each month in a loan with a shorter term and a lower interest rate? What about mortgage insurance, down payment requirements, prepayment penalties, or rules regarding the use of the property? All of these factors can impact the total cost of your loan, so you’ll need to choose wisely.
- Product Features: Loan products come in a huge variety of shapes and sizes, and different products offer different freedoms, set different requirements, and provide access to different rates. Understanding the benefits and limitations of a particular loan is crucial when selecting a home loan.
At PrimeLending of Wichita, Kansas, we understand that every borrower is unique. We don’t waste your time with cookie-cutter suggestions. Instead, we make it a point to learn about you and your plans so that you find the right home loan for your specific situation. We offer an extensive selection of loan products, and we’ll use our expertise to identify your best options, help you explore the possibilities, and guide you through the entire loan process. Contact us today to start your journey toward homeownership.