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| Mortgage Interest Rates – How do they
work? Mortgage interest rates depend on the market conditions. The FED (Federal Reserve) sets the rate and the lender tacks on a margin. The lender earns this margin; the rate the FED sets is the amount the lender has to pay to borrow that money in order to lend to you. The margin is their profit. There’s really nothing you can do to change them unless you can reduce the lender’s risk. This means a larger down payment. Even if you have perfect credit history, there’s only so low that a lender will go. See your credit report online instantly It all comes down to risk, the larger the down payment, the smaller the risk for the lender and so they will be more willing to lower your mortgage interest rate. Another way to put is to pay points. One point is one percent of the total you borrow. Instead of paying more of a down payment, you can pay points separately. Points could be considered a part of the down payment; they’re not classified as the same though. The main idea is that you’re paying more money now. Your mortgage interest rate goes down, so over the course of the loan, you pay significantly less interest. However, you already paid it up front. So you need to weigh out whether your money is worth more to you now or later. Calculate how much interest you would be paying without the points and with the points and evaluate the results – although it might seem like your paying a lot less in interest with the points – the money was paid now. If you had the money now, how much more convenient would it be? Is that money just sitting around doing nothing? Or is it potentially needed to pay for something? It’s a question of financial flexibility, if you can afford to pay points up front and it will not cause havoc in your finances, then go ahead. However, if this extra money is sitting around for a specific reason, then you’ll need to rethink what take priority. If you end up moving before the mortgage is over, then you lose those points. You’ll sell the house, but if you were going to move, you didn’t need to spend the money up front. Mortgage interest rates fluctuate in the market everyday so the rate you discussed might not be the rate that’s on the loan agreement. You can protect yourself from increasing interest rates by asking for a “lock-in” – this guarantees you the rate that was agreed upon. On the day you sign the contract, this “locked-in” rate is the rate that will be on the agreement. This protects you from increasing rates, but it also prevents you from getting potentially lower rates. The mortgage interest rate fluctuations will not impact you loan agreement. Find the right mortgage for your needs, view mortgage rates, and apply. Do some of your own research on current market conditions and speak to the lender. Try to assess what you think will happen in the near future to mortgage interest rates and then discuss it with the lender or maybe friends that are professionals in the industry. You should talk to the lender, but also other people because the lender is working in the best interests of the bank, not you. If you do decide to get a “lock-in” rate, get it in writing before the loan agreement is signed. When it come time to sign the contract, make sure you read everything, if there’s anything you think the lender left out, speak up about it because it might have been done intentionally. Do not hesitate to ask questions even if you think you’ll sound stupid because in the end, it’s your money. Not understanding what you’re doing with your money would be a dire mistake.
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