Interest rates 101

Besides the home price and property taxes, one of the biggest factors in determining your monthly payment will be how much interest you’re paying on your mortgage loan. Interest rates vary. To understand how to get the best interest rate on your mortgage, keep these ideas in mind while you’re shopping for a home mortgage.

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Pointers on points

Points defined

You can pay for points to reduce the interest rate on your loan. One point is equal to 1% of the loan amount. Keep in mind, you’ll need to pay this amount at the time of your home purchase.

Lower rates

Many loan programs allow you to have a lower interest rate by paying a fee in points. The more points you are willing to pay, the more the rate is reduced.

When to get points

If mortgage loan rates are high, paying for points may be a good way to lower your rate. Another consideration is how long you plan on being in your home. Paying for points means more upfront costs that save you money over time.

The credit score connection

Your credit score may influence the interest rate you receive. Lenders look at your credit history as a way to determine your creditworthiness, or how likely you are to repay your loan. If you have a low credit score, they may ask for a higher interest rate to offset the risk of the loan. And if you have a higher credit score you may qualify for the best – and lowest – rates offered by the lender.

Where do mortgage rates come from anyway?

That’s a good question with a complex answer. Rates are influenced (but not determined) by the ups and downs of the Federal Reserve (or Fed). These rates may fluctuate daily – even several times during the day – but often only by small margins.

Just as important as the market mortgage rate are other factors that become part of a larger calculation the lender uses to determine your interest rate based on your particular situation. The most common additional factors involved in coming up with a mortgage loan include:

  •  Your credit score
  •  The type of property
  •  Your loan term (length of the loan)
  •  The loan amount
  •  Your down payment amount
  •  The home appraisal

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