If you want to buy a home, then you’ll need to take out a mortgage. But obtaining a mortgage is just one step of the homebuying process.
If you’re on the road to homeownership and curious on how to get started, you’ve landed on the right article. Here, we’ll explain (in simple, easy to understand terms) what a mortgage is, how lenders determine mortgage rates, how you can qualify for mortgage rates, and more.
What is a Mortgage?
A mortgage refers to the type of loan that helps you buy a house. It’s a way to purchase a house without having every penny of cash up front.
A mortgage is also an agreement between you and the bank that you’ll repay the loan plus interest. If you stop paying your monthly mortgage, the bank has the right to foreclose on your home (take it) and force you to leave.
Mortgages are a huge responsibility, and not everyone qualifies for one!
Mortgages work in a two-part process: The bank pre-approves an applicant based on your income and credit history so that you can make an official bid on a house. Then once an offer is accepted, the bank issues a detailed monthly payment plan spread over years (or decades).
Unlike any other loan, with each mortgage payment you build equity and slowly take ownership of the home that is appreciating in the market.
Mortgage Interest Rates
Once you grasp the mortgage meaning, it’s time to learn about the different mortgage loan types and how interest rates impact each type. Getting the right interest rate can dramatically change your monthly payments over the life of the loan and save you upwards of hundreds of thousands of dollars, depending on the size of your loan.
We’ve listed the different options on our website in order of most common to least common but note that not every option below is always available with each type of mortgage loan.
Fixed interest rates mean you’ll pay the same amount through the life of your loan. If you have a loan for 15 or 30 years and an interest rate of 4%, the interest rate will remain fixed for the entirety of the loan.
Adjustable interest rates mean your interest rate can increase after a period of time. But what attracts buyers to this option is the fact they often start off with a lower interest rate and get approved for a higher loan.
When interest rates are really high, adjustable rates are your best option. In today’s economy where rates are at a record low, a fixed rate is best.
The Mortgage Process
However, once you’ve found your dream home and your offer is accepted you need to complete the complex loan closing process.
What’s that mean?
It’s where you shop for homeowner’s insurance, receive a loan estimate and lock rate, and work with your lender on closing requirements. It sounds like a lot, but don’t fret, we’ll walk you through the home buying process step-by-step.
Factors Lenders Consider When Determining Your Mortgage Rate
How do lenders determine mortgage rates? Mortgage rates are a complicated piece of work. And multiple economic factors influence what drives mortgage rates up and down. Below are a few staple items that lenders look for when determining mortgage rates for individuals.
Your credit score is one of the most important parts to qualify for a mortgage, and it directly impacts mortgage rates. Lenders use credit scores as an indicator that the borrower will meet obligations.
Employment and Income Stability
Lenders consider both your assets and your income to help determine whether or not you qualify for a mortgage. Your lender wants to see that you’ve consistently held a job for over a 2-year period and will likely continue to do so in the future.
Debt-to-Income Ratio (DTI)
Your DTI can easily make or break your chances of a lender approving your for a mortgage. This percentage serves as an indicator how responsible you are with your debts.
A larger down payment means a lower interest rate because lenders see a lower level of risk. If you are only putting a small percentage down, then your mortgage rate will be greater, because the lender is taking on more risk.
Your lender wants to guarantee that you have money to pay your mortgage, therefore, they want to see money in your savings and checking accounts – as well as things like 401ks, stocks, bonds, etc.
Finding the Best Mortgage Rates
If you’re ready to find the best mortgage rate then it’s time to decide what type of loan to get, how much of a down payment you’re willing to part with, and shop for lenders.