To understand a mortgage rate does not take the brains of a rocket scientist. It’s actually the equivalent of a personal loan rate (money you borrowed from the bank to buy a boat, for instance), the annual percentage rate (APR) of your credit card, and the rate on your line of credit. The only difference is that a mortgage rate is the interest you pay for the house – brand new or not – you just bought.
The mortgage rate usually is established based on some economic factors: the cost of homes, the number of people who are looking to buy their first homes, the prime rate in effect at any given time, and the theory of supply and demand. Of course, other economic factors come into play as well in establishing the mortgage rate: the rate of inflation, housing index, and others.
The mortgage rate can be fixed (the rate stays the same throughout the term of the loan – 3, 5, 7, 10, 15 years) or can be open (sometimes called a variable mortgage rate). An open or variable mortgage rate is based on the Federal Reserve’s prime rate and lenders raise this higher with a few more percentage points. As an example, if the Federal Reserve fixes the prime rate at 5%, a possible variable mortgage rate would be 5% + 2%, or 5% + 3%. The additional percentages are usually decided by the individual banks and can be adjusted at their discretion. A valuable customer, let’s say, would be offered a preferential rate that is usually much lower than the advertised rate. Also, having substantial assets or mortgage protection is also looked at favorably and can influence the lender’s decision to offer you a lower mortgage rate.
The Most Profitable Route
Many banks do offer a variable mortgage rate that is below prime. When interest rates are low, a variable mortgage rate would be the most profitable route to go. When interest rates start to rise, you can opt to have the mortgage rate locked in and go instead for a fixed rate mortgage, the idea being to avoid paying as much interest.
More full article here
Before filing your mortgage application, make sure you have all the required information filled in. Not providing the correct information can delay the mortgage process, and if the housing market is hot, like it was in the last 5-6 years, you’ll want the bank to give you a mortgage rate and monthly payments that you can live with.
If you’re not sure about how much you can afford and don’t want to appear unprepared before your banker, use a mortgage calculator – better yet, use a free mortgage calculator to help you determine affordability. You may like a certain kind of house, but if you can’t afford it, why not go for something more modest? Besides, lenders usually set a limit for borrowers on how much of their monthly income should be allocated for housing payments.