3 Things You Need to Know About Your Mortgage's Interest Rate

3 Things You Need to Know About Your Mortgage's Interest Rate

The process of buying a home can seem a bit like a labyrinth. Between the paperwork, the purging and packing, and the paint jobs, there are many considerations that you'll have to make before settling in.

Fortunately, the home search also comes with maps that can steer you towards making financially-sound decisions. One of these guiding factors is your mortgage's interest rate, which determines the amount you'll pay in interest when you borrow to buy or refinance.

When you pay your mortgage, you're putting money towards two different things: The principal, the amount you originally took out, and the interest, the money that accrues over the course of your home loan payments. Because your interest has such a large impact on your home purchase and ongoing finances, it's important to understand these three factors.

1. Small Increases Have Big Impacts

The difference between 3% and 4% might not seem substantial, but it can actually mean a lot for your bank account. According to Trulia's Chief Economist, Jed Kolko: "The mortgage rate really matters because...on a standard 30-year fixed-rate mortgage, the monthly payment on a $200,000 loan would be $955 for a 4% mortgage versus $1074 for a 5% mortgage. That’s a monthly difference of $119." Don't take the small numbers lightly when putting together your home loan package.

2. Lower Rates = More Home

While the smaller differences in mortgage rates impact your monthly payments, the larger increases and decreases in rates over time can also determine how much home you can purchase.

3 Things You Need to Know About Your Mortgage's Interest Rate

As the above chart demonstrates, record-low mortgage rates can multiply the amount of home you can afford. In this scenario, you would still be paying about $988 per month across the board, but the lowest interest rate enables your purchase of a more valuable home. 

3. Your Credit Score is the Key

Mortgage lending relies on risk-based pricing. This enables the lender to increase your mortgage with every risk associated with your credit record. It's important, then, to understand your credit history and, if necessary, rebuild as much as you can. Money Under 30 offers an example of the credit score's impact, using two different scores: 

A 750 credit score could qualify you for a $200,000 30-year mortgage, at a rate of 3.625 percent. That translates to a monthly payment of $912.


With a credit score of 625 however, your rate would be 4.125 percent for a mortgage of the same size and term. This would result in a monthly payment of $969.


The 625 credit score will result in a monthly payment that’s higher by $57 per month. If you multiply that by the 360 month term of the mortgage, you’ll be paying $20,520 extra over the life of the loan. 

Use resources like Credit Karma to monitor your credit. The more you know about your financial profile, the more power you'll have as you buy a home. 

As you explore your loan options, remember to shop around and research different lending institutions. When you're ready to begin your search for a new home, give Real Group Realty a call!

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