Speak to a loan professional who understands your local housing market to get the best rate possible on your home loan.
If you’re looking to buy a house, you’re in luck because mortgage interest rates remain at very reasonable levels, ranging from around 3 percent to 4 percent.
The interest rate, of course, is the percentage you pay your lender to borrow the money to buy a particular house, so lower interest rates help provide you with greater affordability in a home.
“The affordability of a home is based on the monthly payment, which is driven by the interest rate and the amount that you borrow,” says Dustin A. Wells, senior vice president and division manager with IBC Mortgage in Austin, Texas.
How Interest Rates Are Determined
Even with such reasonable rates, certain factors can raise or lower your interest rate, which in turn, affects how much home you can afford.
The most important factor that can affect your interest rate is your credit score. A negative impact on your credit score (such as a late or missed credit card payment) can translate into a higher interest rate, even if your finances are otherwise in order. A second key factor is your loan-to-value ratio, or the percentage of the property’s value that is being mortgaged. Finally, the type of loan you get can affect the interest rate you receive.
“As you’re shopping around and trying to find the best or most aggressive rate, you’ll see the rates change depending on the financing vehicle you’re choosing,” Wells says.
With government-insured loans, such as FHA, VA or USDA loans, rates tend to be lower because that government guarantee provides some sharing of the risk with lenders.
Conventional loan rates are driven by credit scores, says Wells, and can be competitive. Fixed rates are more prevalent now and often more aggressive than adjustable rate mortgage (ARM) rates.
“What we’ve seen in the last three to four years has really been
a transition to fixed-rate mortgages,” Wells says. “You don’t see the advantage now with the ARM loans that you saw before the economic downtown.”
He cautions consumers shopping for interest rates to be wary of ads promoting interest rates that seem too good to be true.
“In the fine print, it’s going to indicate that you’ll have to pay points — an out-of-pocket cost associated with obtaining that rate — or it may advertise a rate for a product such as a 1-year ARM or a 10-year term,” he says.
While researching lenders and loan types online is a good place to start, but Wells advises not relying entirely on phone- or web-based applications.
“I think both of those are fine, but they’re not a replacement for sitting down one-on-one with a loan professional,” he says, adding that finding someone who understands your local housing market is of paramount importance.
For that one-on-one talk with your loan professional, Wells provides several questions to ask:
- What is your loan process?
- In your experience, how long does it usually take to process a loan?
- What is your policy for getting my interest rate locked?
- How will my closing be handled?
- Will you be attending my closing?
- What are your fees and costs associated with processing, underwriting and closing the loan?
Developing a good relationship with your loan professional is also helpful when it comes time to lock in your rate, as well as for how long to lock in the rate.
“Part of their job is to be monitoring and managing that process for you. If they see the market rates get very aggressive and improve, they should be proactively contacting you that it would be a good time to lock in your rate,” Well says.
Judy Marchman is a freelance writer and editor with more than 20 years’ experience. She writes about a variety of topics, including real estate and home-related articles.