Preparing to purchase a home requires time, planning, and attention to detail. Budgeting is essential in this process because it helps you understand how much home you can afford given a multitude of variables, including down payment and monthly payment. And one of the most important factors that impact your monthly payment is the mortgage rate on your loan.
Use this handy guide to find out what you need to know about mortgage rates and how they affect your monthly payments:
What is a Mortgage Rate?
A mortgage rate (often referred to as an “interest rate”) is the “cost of borrowing” for buyers who take out loans to finance the purchase of their home.
This rate helps determine a person’s monthly payment.
How Do Interest Rates Work?
Mortgage rates aren’t set by one specific entity or person. Rather, they’re an amalgamation of economic factors including inflation, economic growth, and unemployment rates. The Federal Reserve plays a role as well while 10-year Treasury bonds are also linked to mortgage rates.
Likewise, rates can differ from one person to the next. Personal factors include:
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Credit score
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Down payment amount
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Loan amount and length
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Debt-to-income (DTI) ratio
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Loan type
How Can an Interest Rate Impact Your Monthly Payment?
The interest rate on your mortgage has a direct impact on your monthly payment.
The rate is what your lender charges to borrow the money to purchase your home. As a result, your monthly payment consists of principal and interest payments. The former goes to the repayment of the loan balance and the latter toward the lender as payment for its services in letting you borrow the money.
There are several other factors that determine your monthly payment. They include:
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Credit score at time of purchase
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Down payment
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Loan amount and length
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Property taxes
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HOA fees
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Private mortgage insurance (if your down payment consisted of less than 20% of the cost of the home)
How to Calculate Your Interest Rate Before You Buy a Home
One of the easiest ways to estimate your monthly payment is by using a mortgage calculator. These tools help you determine potential loan costs based on prices, loan term length, PMI, interest rates, property tax, and more.
Can You Change Your Interest Rate?
Yes, it’s possible to refinance your loan to a different rate. When interest rates drop, people who want to lower their monthly payments may decide to refinance their higher mortgage rate.
For example, if you purchased your home at a 6.375% interest rate and you find a lender offering a 30-year loan at 4.25%, you can work with that bank to refinance to the lower mortgage rate.
However, keep in mind that this process can be costly, require a new credit check, and involve a lot of paperwork. So, if you decide to refinance your home loan, make sure you’re prepared accordingly.
We recommend contacting your lender and REALTOR (if applicable) to better understand what to expect and learn more about the process as it applies to your situation.
