Why it is important to understand mortgage rates when preparing to buy a home

When buying a home, getting the right mortgage terms is a big deal. It determines how much you will pay on the loan over its lifetime, what fees may be associated, and how those payments fit into your budget and long-term plans. You may not want to stick with the first mortgage offer you are given by a lender, as shopping around for better rates can result in significant savings down the road. You will want to make sure you have done enough research so that you understand mortgage rates enough to make the right decision when closing on your new home.

Mortgage Terms

A major factor in the home buying process is the mortgage terms. Terms can be fixed-rate, adjustable-rate, government-backed, interest-only, or jumbo. 
Fixed-rate mortgages are usually for 15 to 30-year terms and are favored by home buyers who plan to be in their new home for a significant period. Because the loan is paid off over a long time, monthly payments tend to be lower and are fixed, which is convenient for people who like the predictability of one monthly payment. 30-year mortgages are the most popular for home buyers, as payment terms are generally flexible and allow the borrower to pay more each month if they would like to pay down their loan balance faster. 
Adjustable-rate mortgages generally have an initial 5 to 10 year period during which the interest rate is locked in, after that, the interest rate adjusts to the current market. This can mean either an increase or decrease, but it is impossible to predict at the start of the mortgage what interest rates will look like years down the road when the rate adjusts. This option is generally better suited for buyers who do not anticipate staying in the home long as there are fewer upfront costs.
Government-backed mortgages are usually issued by the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), or the Department of Agriculture (USDA). FHA loans are good for people who want to put down as little as 3.5% toward the down payment, while both VA and USDA loans have no down payment requirements. Interest rates of USDA loans can be as low as 1%.
Jumbo and interest-only loans are less common. Interest-only mortgages are designed to be short-term with small monthly payments. They are best suited for people who do not intend to be on the property long. Jumbo mortgages are greater than conventional loans and are usually issued to only wealthier individuals who have a high credit score and can provide documentation they can afford the home, typically by demonstrating that they at least have the first year of mortgage payments in the bank.

Shopping Around

Interest rates can vary between lenders, making it important to get multiple rate quotes from different lenders. Each lender has different requirements that affect the interest rates they are willing to provide to borrowers. Getting multiple quotes ensures that you are getting the best rate and allows you to better negotiate with lenders to bring the interest rate on your home down. When you shop around, you can save thousands of dollars over the lifetime of the loan. Getting multiple rate quotes does not affect your credit if it is done within 30-45 days, as credit bureaus have agreed that multiple rate quotes typically end in just one home mortgage.

Using Points

When buying a home, you may want to consider buying discount or mortgage points on your loan. These points are typically sold by lenders for 1% of the total loan amount and allow buyers to take advantage of lower interest rates. While the amount a point affects the interest rate is not set, generally, one point will lower the interest rate by 0.25%. Point costs are included in the closing costs, and with some states placing a cap on how much that can be, typically lenders only allow borrowers to buy up to 4 points. However, borrowers can also buy fractions of points if they wish as well. 
Researching points is important as it will be important for homebuyers to understand if points are a better investment than placing more into the down payment. For homebuyers looking to stay in the property, long-term points can save thousands of dollars over the lifetime of the loan by lowering the interest rates. For people looking to live in the property short-term, they will need to at least stay past the breakeven point to make points worthwhile. If that is not an option, these homebuyers may be better off placing more money into the down payment.
Each loan will be affected by the borrower’s credit and income, making it important for them to explore the mortgage options that work best for their situation. Without talking to lenders, borrowers cannot get a personalized offer that considers their financial details. Researching to understand how different factors affect mortgage rates will be an important factor for a successful and smooth home buying process. New homeowners don’t want to be caught off guard by something they encounter in the process.