Mortgage interest rates are one of those things that people care a lot about when they are shopping for a home, but often misunderstand.
At Maple Tree Funding, we’re in the business of helping people finance their homes, and we are passionate about all things mortgage. We work hard to ensure that our clients and customers understand the mortgage process and all the components that impact what they will pay for their home.
Here, we’ll delve into the concept of mortgage interest rates so you can understand what they are, why they matter, and how they will impact your home purchase so you can make well informed decisions as you work towards your home purchase.
A mortgage interest rate is essentially what it sounds like – the rate of interest that you are charged on the money you borrow from a lender to purchase a home.
Mortgage rates vary based on a number of factors, including your credit profile, the lender you choose, and the current state of the market.
Your mortgage interest rate may also vary based on the type of mortgage you choose. If you choose a fixed rate mortgage, your rate will stay the same for the life of the loan. If you decide to go with an adjustable rate mortgage, your rate may fluctuate.
This short video gives a great overview of the important things to know about mortgage interest rates as you’re shopping for a home.
Many people think that they will pay less if their mortgage interest rate is lower. However, this is not always the case.
The lowest mortgage interest rate does not always mean the lowest monthly payment. The truth is, there is a lot more that goes into determining your monthly payment than the rate.
There are some other fees that may influence how much you’re paying for your home on a regular basis, including:
These additional fees and monthly costs can add up to thousands of dollars. (You can learn more about what’s covered in a monthly mortgage payment here.)
As a result, many people choose to take a higher mortgage interest rate to cover their standard closing costs – a practice that’s called ‘getting a credit for the rate.’
If you plan to put less than 20% down on your home at closing, there is a good chance that mortgage insurance will be required. This insurance protects the lender’s investment in case you are ultimately unable to pay off the loan.
You’ll have to cover the cost of private mortgage insurance with an additional monthly payment (borrower paid mortgage insurance, or BPMI) or financed into the rate and covered as part of your regular monthly payment (lender paid mortgage insurance, or LPMI). (Check out our overview of private mortgage insurance here for more details.)
The relationship between mortgage insurance and your mortgage interest rate originates from the fact that mortgage insurance has a rate of its own. If you have a lower mortgage insurance rate you could end up with a higher mortgage interest rate, but still have an overall lower monthly payment in the end. This is another scenario in which a lower interest rate doesn’t necessarily mean a lower monthly payment.
At the end of the day, what really matters is what’s coming out of your bank account to cover the cost of your home – both in terms of cash to close and in terms of your monthly payment. Your mortgage interest rate can impact both.
If you’re looking to get the best rates and make the lowest monthly payment, it’s in your best interest to work with a mortgage broker.
At Maple Tree Funding, we offer some of the lowest standard closing costs, plus we can help you find affordable mortgage insurance and secure a low mortgage interest rate. We’ll help you understand which options are right for you and answer any questions you might have about mortgage interest rates along the way.
Our goal is to help you have one of the lowest monthly payments available for your specific situation! If you’re shopping your mortgage options, get in touch with us today!