Your Home Mortgage Loan and Interest Rates:
The most important factor to be considered when applying for a home mortgage loan is, obviously, the interest rate. The monthly installment that you will be paying is completely dependent upon the interest rate. A slight rise or fall in the rate could make a big difference in your monthly payment.
The best thing, of course, is to keep the interest rate to a minimum. You will find you can afford more home when the interest rate is lower. However, the rate of interest on a loan is also dependent on a number of factors. You can be in charge of a few, while others may be out of your control.
The Federal Reserve controls the rate of interest in the United States. It is the Federal Reserve’s responsibility to keep inflation under control. Therefore, interest rates are adjusted accordingly. There is no point discussing potential rate adjustments as they are out of our control.
Our time would be better spent considering the factors which are within our control. First of all, we need to make a choice as to whether we prefer a fixed-rate mortgage or an adjustable-rate mortgage.
Adjustable Rate Loans vs Fixed Rate Loans:
The rates on an adjustable-rate mortgage (ARM) will vary as per the changes made by the Federal Reserve. They are subject to rising one year, and perhaps lowering a bit the following year. On the other hand, with a fixed rate mortgage the interest may initially be slightly higher than the ARM, but the interest rate will remain the same for the entire term of the loan.
* Check current mortgage interest rates here – Home Mortgage Loan Rates
Paying discount points can help in buying down the interest rate. One percent of the total loan is equal to one point and thus for a loan of $200,000, one point would be equal to $2,000.
All lenders offer different discount percentages but in general, they offer a reduction of 0.25% for every discount point you pay. This means if your rate of interest is 6.75% and you are paying one point then the interest rate will be lowered to 6.50%.
The time you plan to live in the home is an important factor to consider before paying discount points. You must calculate the total cost to you with and without points before reaching a conclusion. Then determine how long it will take to pay off this additional amount.
Length of Your Home Loan – 15 Year vs 30 Year:
Choosing a shorter term for repayment of the loan is another option to reduce the interest rate. It will be lower for a 15-year loan as compared with a 30-year loan. However, you would be paying higher installments as you need to repay the loan in 15 years rather than 30 years.
Personally, I prefer to go with the 30-year loan. You can always send additional money toward the principal whenever you please. This way you are not locked in to the higher payments, but you can still have the home payed off in 15 years if you are able to make regular payments toward the principal each month.
Staying on top of your credit report is a major factor in keeping your interest rates low, whether you are applying for a home mortgage loan, an auto loan, or applying for credit cards.
Keeping your credit score as high as possible means you will be able to qualify for the lowest interest rates. Checking your credit reports annually is always a good idea. Review your reports and ensure that there are no errors and always remember to pay all of your bills on time.
In case of late or missed payments, your credit score will go down and thus the interest rate for any loans you apply for will be higher.