Picture of woman shopping for interest rates

Home Buying

The Biggest Factor in Determining the Price of a Mortgage Is…

November 27, 2018 | by Reuven Shechter

At A Glance

Buyers should know that there is one factor that impacts the price of a mortgage on every house they consider. Talk to a seasoned real estate agent who can walk you through the process.

Picture of woman shopping for interest rates

Updated May 11, 2019

Most buyers can't put up the money to cover the six-figure price tag of a house on their own. So they rely on taking out a mortgage loan that they pay off every month for 15, 20, or 30 years. This arrangement significantly decreases the amount that buyers have to pay out of pocket...but it increases the amount they pay overall.

Can you afford to get a mortgage on your dream house? A great real estate agent can help pair you with the right lender for your financial situation. The answer will depend on a lot of factors, but one number remains supreme in determining the price of a mortgage.

The biggest factor in determining the price of a mortgage is the interest rate.

All About Interest Rates

The amount of money that you're borrowing to pay for your home is called the principal. In addition to paying off the principal, you will have to pay interest as a “thank you” to your lender. These interest rates are a percentage of the principal that you have left to pay off, and small amounts of interest are added to your monthly payments.

Your lender’s trust in your ability to repay the loan essentially determines your interest rate, along with market factors. Since interest rates add to the overall cost of your home, consider how your financial situation may impact interest rates and how much you pay down the line.

How do you determine interest rates?

The Down Payment

Mortgages pay off the total cost of the home, and you can get a larger chunk of this cost out of the way with a larger down payment. A larger down payment also gives you the chance to pay less interest; buyers who put 20% down on their home will have a significantly lower interest rate than buyers who put 5% or 10% down.

Why? If the buyer has enough money to put down a lot of money up front, lenders are more likely to trust that they will pay off the rest of the house. That low level of risk is rewarded with a lower interest rate.

Credit Scores

How does a lender know that they can trust you? They take a look at your credit score, a number determined by your credit history. Any time you open a financial account, buy real estate, or take out a loan, your credit score may be affected.

Buyers with higher credit scores will usually get a lower interest rate than buyers with a lower credit score. Your ability to pay back your mortgage will affect your overall credit score, so it is very important to find a mortgage with an interest rate that you can afford.

The Economy

Mortgages are a 30-year commitment. A lot can happen to the economy and your ability to make mortgage payments over 30 years. At the present moment, our strong economy is slowly increasing interest rates, but that could change in the next few years (or a few months!). Talk to a financial advisor about the best time to take out a mortgage loan.

How to Get a Better Interest Rate

  • Improve your credit score. Pay off debts, pay bills on time, and don't max out your credit cards.
  • Shop around for different offers.
  • Get an adjustable-rate mortgage. The interest rate may increase over time but will start at a lower rate than fixed-rate mortgages.
  • Put a higher down payment on your home.
  • Provide more proof that you can be trusted, like detailed employment history.
  • Wait for interest rates to go down around the country.

Other Factors That Determine Mortgage Prices

Interest rates can have a significant impact on how much you're paying to purchase a home (and how much you pay each month). But there isn’t just one way to pay back a mortgage. The type of loan that you take out and your agreement with the lender could have a significant impact on how much you pay for your mortgage.

Cost of the Home

It should go without saying that the cost of your home will have a big impact on the cost of your mortgage. But consider how property taxes or renovation plans will impact your mortgage. Additional payments or loans may affect your ability to make monthly payments.

Loan Terms

If you're taking out a 30-year fixed rate mortgage, you will probably be relieved by the lower monthly payment. But for each extra month that you're paying off your mortgage, you're accumulating more interest. A 15-year fixed rate mortgage will have significantly higher payments, but more of your loan will be paid off each month and your interest rate will be lower.

Adjustable-rate loans may also increase the price of the mortgage by increasing the interest rate over time. Interest rates may change depending on the adjustment periods of the loan and market conditions.

Buyers can affect the overall cost of their mortgage by choosing the best loan with the best interest rate for their situation. Prepare before you take out a mortgage loan. Talk to a lender as it may impact the overall cost of your mortgage.

Need a real estate agent to help you find that house of your dreams? Call Clever. Clever's Partner Agents are the best agents in your area and you could even get a buyer's rebate for working with them. Call us today at  1-833-2-CLEVER or fill out our online form to start.

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