When it comes time to purchase a home, you’ll hear a lot about mortgage rates. In short, your mortgage rate is what it costs each year to borrow the money and is expressed as a percentage rate. Generally, the amount of interest you pay every month is added to the principal amount you repay monthly. In this blog post, we’ll discuss everything you need to know about mortgage rates so that you’re as prepared as possible for your journey towards homeownership. 

You’ll quickly notice that mortgage rates are different from day to day. While your mortgage rate is a percentage of your total loan balance, the actual amount is different for everyone based on several variables. First, it’s important to know that the strength of the economy has a lot to do with what the rate will be. Also, your specific circumstances will determine the rate you get. For instance, your credit score and the amount of your down payment are both factors when calculating your individual rate. Finally, rates can vary by lender and which loan program you decide to use when obtaining your mortgage. There are a lot of moving pieces in one’s quest to find the best rate, which is why it’s important to understand them all. 

Fixed-Rate vs. ARM 

Lenders tend to offer two types of mortgage terms, a Fixed-Rate Mortgage and an Adjustable-Rate Mortgage (ARM). With a Fixed-Rate Mortgage, your monthly principal & interest payments stay the same through the entirety of the loan. That’s because your interest rate is locked in and doesn’t change. An Adjustable-Rate Mortgage, on the other hand, uses a rate that varies based upon the market. Therefore, the monthly payment may change over time as your interest rate increases or decreases along with market trends. Most ARMs do have a limit on how much the interest rate can fluctuate, along with how frequently it can be changed. When the rate goes up, generally your monthly payment will as well. The initial interest rate on an ARM is usually lower than a fixed-rate mortgage.  

How Will Your Mortgage Rate Be Determined? 

Your mortgage rate is important because it will affect how much you pay throughout the length of your loan.  A lower rate can mean paying thousands of dollars less over the loan term.  However, when you see lenders advertising mortgage rates, they are required to disclose the annual percentage rate (APR) which reflects the mortgage rate, points, lender fees and other charges you will pay with your loan. The APR helps you compare rates and loans terms being offered by different lenders.  Landing the best mortgage rate and APR possible has a lot to do with your specific circumstances. Some of the most important factors that determine your mortgage rate will be your credit score, debt-to-income ratio, and the amount of money you have for your down payment. The better financial situation that you are in, the lower of a risk you are as a borrower.  

How Long Will Your Rate Be Good For? 

You’ve worked with a lender to determine your mortgage rate, but you still need to find a property. As mentioned above, rates can change from one day to the next so how do you know the quoted rate will still be available when all is said and done? That’s where a rate lock comes in.  

A rate lock is a written guarantee from your lender that you’ll receive a certain rate for a specific time period. This protects you if interest rates rise before you close on your home loan. Usually, rate locks are good anywhere from 30 to 60 days depending on what you and your lender have agreed upon in a rate lock agreement. On the flip side, if mortgage rates fall below what you’re locked into, you might be able to request a “float down” option where you may be able to pay an extra fee at closing in exchange for the lower current rate.  

Getting Started 

Understanding mortgage rates is not difficult. They fluctuate daily until you decide to enter into a rate lock agreement.   The final rate you receive for your loan is determined by the lender after reviewing your loan application, supporting documents, and credit score.. Speaking with a mortgage professional is the first step in your journey toward homeownership.  At Silverton Mortgage, we consider all financial factors when helping you choose the right mortgage program for your unique circumstances and will help you find the best option for you.