If you’re entering the home market at any point, one of the single most important elements you’ll be considering is the realm of mortgage rates. Referring to the interest rate that you’ll pay over the life of your loan, mortgage rates have a huge impact on the total amount you’ll pay — a change of even a few decimals can play a major role in reducing or increasing the total sum you’ll pay across your entire mortgage.
At Altius Mortgage and our partners with Mortgage Ogden, our team of quality loan officers is here to help clients qualify for the most favorable mortgage rates possible given their situation. This is a broad overview of mortgage rates — how they work, fixed versus adjustable rates, and the factors impacting what your rates will be.
Mortgage Interest Rate Basics
Simply put, a mortgage interest rate is the cost of borrowing money to buy a home. Your interest rate is expressed as a percentage of your loan amount and determines how much you’ll pay each month in addition to your principal repayment.
For example, let’s say you’re taking out a $250,000 loan with a 4% interest rate. Your monthly mortgage payment would include $843 in interest payments and $1,034 in principal and interest payments.
Fixed Vs. Adjustable Interest Rates
One of the most important differentiators within the realm of mortgage interest rates is whether they are fixed or adjustable. A fixed rate mortgage carries the same interest rate throughout the life of your loan, while an adjustable rate mortgage (ARM) starts with a lower interest rate that changes over time.
The most common type of adjustable rate mortgage is a 5/1 ARM. This means that for the first five years of the loan, you’ll have a fixed interest rate. After those initial five years are up, your interest rate will adjust once per year for the remaining term of the loan.
Factors Impacting Mortgage Interest Rates
There are a variety of different factors that can impact mortgage interest rates. Some of these include:
- The strength of the economy: When the economy is strong, mortgage rates tend to be higher. This is because investors are more confident and are willing to take on more risk, which drives up rates.
- Inflation: If inflation is high, mortgage rates will often increase as well. This is because inflation erodes the purchasing power of your dollar, making it worth less than it was when you originally borrowed the money.
- The Federal Reserve: The Fed has a direct impact on mortgage rates. When the Fed raises rates, mortgage rates often follow suit. This is because banks are able to charge more for loans when borrowing costs are higher.
- Your credit score: Another important factor is your credit score. This is because your credit score is a reflection of your ability to repay the loan. The higher your credit score, the lower your interest rate will be.
Altius Mortgage and our team of quality loan officers are here to help you get the best mortgage rates possible given your situation. We’ll work with you to understand your needs and help you find the right loan for your situation. Contact us today to learn more!
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