Interested in Interest Rates?
April 21, 2023
Interested in Interest Rates?
Interested in interest rates? If you are planning to purchase a new Coventry home, you should be. Interest rates will figure prominently in your mortgage payments for years to come. What are interest rates? How do they affect your mortgage? Is there any way to lower your rate? We’ve got the answers to your most pressing questions.
What is a Mortgage Interest Rate?
The interest rate on a mortgage is the amount you will pay the lender for borrowing money to buy a home. The rate can either be fixed — staying the same for the life of your loan — or variable, meaning it fluctuates based on market conditions. Interest rates determine the overall cost of your mortgage and your monthly payments. That’s why it’s important to get the lowest possible rate you can.
What Factors Affect Interest Rates?
The key factors used when determining interest rates are the strength of the economy, inflation and the policies of the Federal Reserve. Inflation tends to rise when the economy is strong. To keep inflation in check, the Federal Reserve will often raise interest rates. Currently, the Federal Reserve is trying to lower inflation. That means mortgage rates are higher.
The good news is that inflation seems to be dropping. Forbes magazine reported that mortgage interest rates are falling as well. Whether they continue to descend is anybody’s guess, which is a fancy way of saying now might be a good time to buy your new home.
What Are the Types of Interest Rates?
When it comes to purchasing a home, buyers have two interest rate options: fixed and variable. Fixed means that the rate will remain the same throughout the life of the mortgage. A variable or adjustable interest rate can change based on the previously discussed factors.
Fixed-rate mortgages are a popular choice because they provide stability and predictability. With a fixed-rate mortgage, you know exactly how much you'll be paying each month for the entire term of the loan. Adjustable-rate mortgages, on the other hand, can offer lower initial interest rates than fixed-rate mortgages, but they can also be riskier. If interest rates rise, your monthly payments will increase.
Ways to Lower Your Interest Rates
There are several ways you might be able to lower your interest rate. The first is simply to have good credit. If your credit score is good, your lender may be more willing to offer you a mortgage at a lower interest rate,
It is also possible to “buy down” your interest rate. You do this by paying extra money or “points” upfront to lower your interest rate over the life of your loan. Each point is equivalent to 1 percent of the loan amount. Your lender can work with you to figure out how to reduce your interest rate in return for a point. As an example, the lender may offer to reduce your rate by .25 percent in exchange for a point. If your mortgage is $300,000 with an interest rate of 4 percent, paying $3,000 would lower your interest rate to 3.75 percent.
Another way to ensure you are paying a low interest rate is to pay for an interest rate lock. Rate locks are offered by your lender. You agree to pay a fee, and your lender agrees to honor a specific interest rate for a set period. If interest rates rise, the interest rate on your loan won’t. Keep in mind that if interest rates drop, you won’t be able to take advantage of the decrease.
A “float-down” lock is sometimes made available by lenders. In this situation, your rate is locked with a proviso that if interest rates drop, you can take advantage of the new rate before you close the loan. The fee for this type of lock is usually higher than a basic rate lock.
You can also buy with an eye toward refinancing. Refinancing a mortgage means paying off an existing loan and replacing it with a new one. While the general rule of thumb is to refinance your home if you can reduce your interest rate by at least 2 percent, some financial advisors suggest refinancing is beneficial even if you only save 1 percent. Since refinancing replaces one loan with another, you could also switch from an adjustable-rate loan to a fixed-rate loan. Some homeowners even switch from a 30-year loan to a 15-year loan.
Buy Your Coventry Home Today
Now that you understand interest rates, visit a Coventry Homes’ sales counselor in any of the outstanding communities we build in. They will help you find the perfect home to fit your budget.