Mortgage rates can greatly affect the amount of house that you can afford. Whether you are talking about over the life of the loan, or the amount of your monthly payment, mortgage rates can make or break your ability to purchase.
Who Gets the Best Rates?
Like so many other issues in finances, it seems that the people that can afford the most will spend the least. There is a legitimate reason for this. Lenders depend on receiving their money, and so make the best offers to the buyers that, in their opinion, are the least likely to default. What does this mean to you?
If you have 20% or more of the purchase price available as a down payment, you will be eligible for the lowest interest rates. Conversely, if you have less than 5% of the purchase price available for a down payment, you can expect to pay a higher interest rate.
Credit worthiness, primarily accessed by using your FICO score also affect your interest rate, as does your debt to income ratio. The amount of money that you can save with a favorable interest rate is substantial enough that you should plan on paying down credit card debt and resist opening new lines of credit if you are planning on buying a home in the next few years.
What Other Factors Effect Mortgage Rates?
The prime rate is the rate that banks nationwide charge their very best customers. From here, adjustments are made based on FICO score and debt to income ratio. Then you will be asked whether you want to pay points or not. These points are basically a trade off. You can take the higher interest rate, over the life of the loan, or you can pay off the points up front, when you close on the loan.
Which decision makes the most sense? It depends on your situation. If you have the extra cash, once you have made your down payment and taken closing costs into account, and you plan on living in your home for more than a few years, it makes sense to pay the points up front, and take the lower interest rate.
If coming up with the money would put you under financial strain, or you plan on selling the home within a few years of purchase, you may want to take the higher interest rate. The reason that the time you plan on owning the home is important is because you may not save enough on a lower interest rate to make up for the amount paid up front in points if you sell in only two or three years.
No matter what choices you make when choosing a lender, it makes sense to shop around for the best mortgage rate available. By getting quotes from banks, credit unions, and internet lenders you will be better able to make an educated decision when choosing a mortgage.