Factors that Affect Your Mortgage Rate
July 25, 2023
Increasing interest rates have many prospective new home buyers recalculating their loan amounts as they try to juggle the numbers to ensure the monthly mortgage payment work with their household budget. According to Freddie Mac, the average 30-year fixed rate reached 6.48% at the start of the year and climbed to 6.96 by mid-July. As the Federal Reserve continues to battle against inflation to reach its 2% goal, many are eagerly watching rates with hopes of settling on a new home before the end of 2023.
To help eager buyers, residential builders, and lenders, are getting creative to take the sting out of high interest rates by offering significant dollars in ‘seller’s help’ that can be applied toward an interest rate buy-down. In a rate buy-down, the money offered by the seller can be used to pay for mortgage points, which lower the interest rate on your loan. Mortgage points vary from lender to lender, but each point typically equates to 1% of the total loan. During Garman Builders’ Summer Saving Event, qualified homeowners can buy down rates between 5.99% and 6.25% depending on the home they’re looking to buy. The 6.25% rate applies to new, pre-built, or “Quick Move-in” homes, which often come with many designer upgrades. In this incentive, Seller Help is designed to create flexibility to meet customers’ needs. Seller Help can be used to buy down the interest rate or as seller assistance at closing.
When evaluating buying incentives and our ever-changing interest rates, it’s important to understand the many factors that influence the interest rate you receive. In this article, we will review the top three factors that affect the mortgage interest rate you are offered.
How Your Credit Score Impacts Your Interest Rate
There is significant power associated with a strong credit rating. Credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent. The closer your credit score is to 800 the greater the chance of getting a competitive interest rate. Your credit score helps lenders determine your ability to repay the money lent to you.
When determining your credit score, credit agencies consider several factors related to your financial history, including payment history (whether you pay your bills on time) and the amount of money you currently need to repay. If your credit score is in the lower ranges of fair or good, taking time to improve the score may offer financial benefits.
A Bigger the Down Payment is Better
Bigger is better when it comes to the amount of the down payment you can make on a new home. A higher down payment can reduce the amount of interest you are charged for your mortgage loan. Think of this as your reward for being less of a risk to the lender.
Most mortgages, including FHA loans, require at least 3 or 3.5% down. And VA loans and USDA loans are available with zero down payment. But if you can put 10, 15, or even 20% down, you might qualify for a conventional loan with low or no private mortgage insurance and seriously reduce your housing costs. May home buying incentives are tied to a borrower putting down 20% of the total cost of the home.
The Benefit of a Short Loan Term
Another factor that affects your interest rate is the length of your loan. Two of the most common loan types are the 30-year fixed-rate loan and the 15-year fixed-rate loan. If a borrower can afford a higher monthly payment, the 15-year mortgage offers some significant financial benefits. With a 15-year fixed-rate mortgage you pay more each month due to the shorter loan term but the amount you pay in interest is greatly reduced.
For example: If you took out a $300,000 home loan with a 30-year fixed rate of 5.5%, you’d pay around $313,000 in interest over the life of the loan. The same loan with a 15-year fixed rate of just 5.0% would cost only $127,000 in interest — saving you $186,000. It’s hard to argue with that math.
To learn more about Garman Builder’s Summer Saving Event or to be connected to one of our lenders to explore how you can get the best interest rate, contact our Online Sales Advisor.