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What Are Mortgage Rates and Why Are They Important?

When it comes to buying a home, the mortgage rate youll get is one of the most important factors that determine your monthly payment and total amount you pay. Understanding what affects your mortgage rate can help you find a better loan.

Your mortgage rate is a unique number thats affected by your personal financial situation as well as larger economic factors. Your lender calculates your rate based on many factors, including your credit score, loan terms, down payment size and home location.
Interest rate

Mortgage rates are one of the most important aspects of the home buying process. While they change from time to time, it’s possible for a buyer to get a great rate that can save them money in the long run.

Interest rates are set by lenders and creditors to cover their costs. They take a variety of factors into account, including your credit score, debt-to-income ratio and the length of your loan.

The economy and monetary policy also influence mortgage rates. Specifically, strong economic growth and inflation tend to result in higher interest rates, while weak growth and lower inflation can lead to lower interest rates.

A borrowers credit score can affect the amount they can afford to borrow, and a lower credit score can mean a higher interest rate. However, a sizable down payment can often bring borrowers into the best rate range.
Payment amount

A mortgage is a long term loan for a house. Unlike credit cards or payday loans, a mortgage can be paid back in 15 or 30 years, depending on your lender of choice. This means a long term plan is a must, especially if you have a family or a growing business to support. Thankfully, most lenders have a good track record of helping homebuyers navigate the minefield of debt to equity. The first step in the mortgage maze is choosing the right type of mortgage for your needs. The next step is finding the best interest rate and mortgage insurance, which you can do online through Smarter.
Fixed-rate mortgage

A fixed-rate mortgage is a loan that offers borrowers a consistent interest rate for the entire term of the mortgage. This protects a borrower from rising interest rates, and it also makes budgeting and financial forecasting easier.

A typical fixed-rate mortgage has a 30-year term length, but some lenders offer other options. For example, some buyers choose a 10-year fixed mortgage, which enables them to pay off their mortgage in half the time.

Another popular fixed-rate mortgage is the hybrid, which is a combination of a traditional fixed-rate loan and an adjustable-rate mortgage (ARM). The hybrid has a fixed-rate for the first five years of the mortgage, then adjusts periodically to match changing market interest rates.

Borrowers often prefer a fixed-rate mortgage over an adjustable-rate mortgage because they want to lock in the lower rates, and they also want to avoid refinancing when interest rates rise. But a fixed-rate mortgage isn’t always the best option for every borrower, especially those with riskier or inflexible budgets.
Adjustable-rate mortgage

A popular choice among first-time home buyers, adjustable-rate mortgages start with a lower interest rate than fixed-rate mortgages. They then adjust as market rates change. ARMs often have interest rate caps that limit how much your rate can rise initially, each adjustment period and in total over the life of your loan.

One in 10 home purchases are now made with an ARM, said Michael Fratantoni, the chief economist for the Mortgage Bankers Association. That’s a big shift from a year ago, when only about 4 percent of loans were ARMs.

ARMs offer lower initial rates and are ideal for borrowers who want to stretch their budgets when buying a new home, but they can be risky long-term. They can make it difficult to budget when payments go up unexpectedly.

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