The purchase of a new home requires learning all about various aspects of homeownership (financial, legal, and practical) that can be overwhelming to a first-time homebuyer and homeowner. As part of our ongoing All About series, LGI Homes seeks to provide an easy-to-read and easy-to-understand resource that goes in-depth on a variety of subjects connected to buying a home. Today, we explore the world of mortgage interest rates and how they will play into your experience of buying and owning a home.
What are mortgage interest rates? – When you borrow money from a lender to pay for your home, lenders agree to lend you the money under the condition that you pay it back, plus interest, within a certain period of time. Interest is a specific percentage of the total loan you have to pay along with paying back the loan. This is how lenders make their money in order to continue offering loans. Your mortgage rate is the additional percentage you owe plus the cost of the loan.
Are there different types of mortgage interest rates? – There are three different types of mortgage rates available to homebuyers. A fixed-rate is a set interest rate that will remain the same from your first payment to your last. Every month for the entirety of the loan, your payment will be exactly the same. A variable interest rate is a fluctuating interest rate that changes based on the condition of the current market. It could lead to lower interest payments in the future if the market is in great shape, or it could drive your payments up if the market suffers. An adjustable rate mortgage (ARM) effects both your interest rate and your loan payment, and both are based on current market conditions. This is generally considered a risky investment.
What determines my mortgage interest rate? – Mortgage rates are primarily determined by current market conditions, though lenders have a bit of room to set their own rates. This is how the market stays competitive.
Can I lower my mortgage interest rate? – In order to lower your monthly mortgage, you’ll have to refinance your home. In order to refinance, you must be current on payments. Refinancing is basically a fancy way of saying that you are trading in your old mortgage for a new one. You can do it through your current lender, or find a new lender to refinance through. Essentially, you borrow a new mortgage and pay off the old one with it, and then make monthly payments toward the new loan. Along with your new mortgage, you will have a new interest rate, which could be lower depending on market conditions. Many homeowners elect to do this when the market makes a quick turnaround and interest rates drop dramatically.
How can I minimize the amount of interest I pay? – Mortgage payments add up over time, and add a lot of money onto the total amount you pay. In order to minimize the total amount of interest you pay, you can try to make payments higher than your monthly minimum on your mortgage. This way, the principle balance is paid off faster, and you are finished paying the loan sooner with less years for the interest to build.
Image license: ShutterStock (view source)