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Your Guide to Understanding Interest Rates (and Your Mortgage)

What is one of the most important things to learn about home buying?

Interest rates!

It can be daunting to understand what they are, how interest rates work, why they affect the home-buying process so much, and how to find and get the best interest rate possible.

These are all questions we must consider when looking at purchasing a home. Luckily, EDGEhomes has a complete guide below that will help you know what to look for when buying your new home.

What Is Interest? 

When talking about interest, there is a lender and a borrower. The lender is the person, business, or bank that provides an allotted amount of money to a borrower. The borrower is someone who uses the person, business, or bank’s money in agreement that they will pay an extra percentage of that money back to the borrower. That percentage is what we call interest.

When we get straight down to it, the interest you pay is essentially the cost of borrowing someone else’s money. When you borrow money, you pay interest on that money that gives the borrower a reason to loan the agreed amount.

How Interest Works

Interest is calculated as a percentage of a loan that is paid over time. Typically, interest is calculated at an annual percentage rate (APR), but they can be calculated for shorter periods of time as well.

When speaking of a home loan, the interest payment is included with the periodical loan payments made to the lender that allows the borrower to pay off the loan and interest at the same time and over an extended period of time.

APR

Generally speaking, though your mortgage payment will remain the same from month to month, it will be mostly comprised of interest in the early years of the loan. The further you get into the life of your loan, the larger portion of your monthly payment will be dedicated to the principal of the loan with less dedicated to interest. This payment breakdown ensures lenders get their interest payments sooner rather than later. Regardless of how your loan payments are structured, the total amount of interest you pay on your loan will be determined by the APR.

How Does Interest Affect the Cost of Buying a Home?

Man sitting in his home office working on a laptop.

Interest rates are always in flux, so what is true today may not necessarily be true or accurate tomorrow.

As an example…

The average interest rate on a 30-year mortgage (as of January 2020) in Utah is 3.88%, and today, rates are historically low, dipping even lower than that rate.

Considering this average for a $300,000 home, the interest rate and loan length time can significantly change the monthly mortgage payment. See the chart below for details.

Mortgage & Interest Payment Chart Example

Even a 0.5% difference in interest rate can change a monthly payment anywhere between $57–$129/month.

On a condominium payment, $57/month makes such a huge difference in your loan qualification, so finding a low-interest rate is crucial.

Whether you are buying a single family home, townhome, or condominium, these interest rates are going to make such a difference in what you are able to borrow and what your payments will look like.

How Do Interest Rates Affect the Economy?

Higher Interest Rates

High-interest rates make loans more expensive, which means that fewer people and businesses can afford to take out a loan. The consumer demand for loans becomes low, yet at the same time, people are incentivized to save more because they receive higher interest on their savings. The high-interest rates then reduce the capital available for businesses to expand, which can slow the economy.

PROS OF HIGH-INTEREST RATES

  • People earn more interest on their savings, which incentivizes more saving.
  • It can be a good time to sell a home.

CONS OF HIGH-INTEREST RATES

  • Loans are expensive.
  • Fewer people/businesses can afford loans
  • Capital is reduced and businesses have a hard time expanding.

Lower Interest Rates

Lower interest rates can increase economic growth. With lower mortgage rates, the cost of housing is more affordable, which stimulates the demand for homes. Business loans are also more affordable which incentivizes business expansion and an influx in capital for sale. Times of lower interest rates are the best times to buy a home.

PROS OF LOW-INTEREST RATES

  • Homes are more affordable. It is a good time to buy a new home.
  • Business loans are more affordable; allows for business expansion

CONS OF LOW-INTEREST RATES

  • Possible inflation
  • Not always a great time to sell a home.

Current Interest Rates

Interest rates are at the lowest they have been in 2 years. Now is the time to take advantage of these low-interest rates to get into the house you have always wanted.

EDGEhomes has Quick Move-Ins that will allow you to take advantage of these interest rates while they are still low.

An Edge homes agent shaking hands with potential home-buyers.

4 Ways to Get the Best Mortgage Rate

1. Increase Your FICO Credit Score

Part of a lender’s decision on how much they are willing to lend and how high or low of an interest rate to lend at is determined by your FICO credit score. The higher your score, the better the opportunity for a lower interest rate.

Why?

Having a high credit score helps show the lender that you are capable of making payments on time, which decreases the risk of lending on their side.

2. Employment History

Be prepared to show W2s and other proof of employment to show that you have been at a job with a steady income for at least 2 years. This also reduces the risk on the lender’s part when they are confident you are able to pay in full.

3. Do Your Research & Speak with a Loan Officer

The best way to ensure you are getting the best possible interest rate is to do your research to find out what current and local rates are. Once you’ve done your own research you can speak with a loan officer, to help further your research and understanding.

4. Lock in Your Interest Rate

Mortgage rates change day-to-day, which means an influx could happen at any point. As your home is closer to completion, work with your lender to lock in your rate. This can be completed approximately 60 days before your home is ready to close.

Conclusion

Interest is the cost of borrowing someone else’s money. When speaking about interest in terms of home-buying, we use the terms APR and mortgage rates. These rates are considered as a percentage of the loan that you must pay back in monthly installments. The lower the mortgage rate, the lower the end cost of your home will be.

These rates change day-to-day so it is important to do what you can to incentivize lenders to give you a good rate, to do your research on who is willing to give you the best rate, and to lock in that rate once you receive it.

Do you have other questions regarding home-buying? Would you like to learn more about the homes we have available right now in Utah? Please feel free to reach out to us at EDGEhomes.

 

Date

04/26/2019

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