How Interest Rates Affect Your Mortgage Affordability

Understanding interest rates can assist in making sound mortgage decisions with confidence. You may know that your interest rate affects your mortgage and the market, but how? What factors determine your rate?

What is an Interest Rate?

The interest rate is the price you pay to borrow money. It’s charged on top of the principal loan amount by your lender. Since rates vary over time, it’s important to discuss what will work best for you with your Loan Originator.

How Are Interest Rates Determined?

Your interest rate is determined by a mixture of factors you can’t control and ones you can. Interest rates are generally higher when the general economy is better. For example, when COVID-19 first hit and portions of the economy halted or slowed, mortgage interest rates were also lower.

Other Factors That Affect Interest Rates

Credit Score

Your credit score is a key factor in your lender’s determination of how reliable you may be when paying back your loan. A higher credit score generally indicates less risk to a lender.

Debt-to-income Ratio

Your debt-to-income ratio (DTI) is the amount you pay towards debts each month divided by your gross monthly income. This metric is used to gauge if your income can support the debt you have, and if you would be able to add a mortgage payment to that debt.

Down Payment Amount

The minimum down payment you’ll need depends on what type of mortgage you’ve chosen. If you can put down more than the minimum, your lender may offer you a lower rate.

Mortgage Type

Rates can be significantly different depending on what type of mortgage you choose. For example, an FHA or conventional mortgage may have a lower interest rate than a jumbo mortgage because of their different eligibility requirements.

Mortgage Term

The shorter your mortgage term, the lower your rate may be. Shorter terms may also result in higher monthly payments because you’re paying off the same loan principal in a shorter time frame.

Interest Rate Type

There are two basic types of interest rates: fixed and adjustable. Fixed interest rates stay the same over the course of your loan. Adjustable rates may have an initial fixed period, after which they may go up or down each period depending on the market.

Understanding the factors that go into your interest rate can help you better determine what mortgage and interest rate are right for you. Working with a lender as unique as your financial situation can help you move confidently through the homebuying process. If you’re ready to take the leap into homeownership, contact us today.