Thinking of buying a new place in Massachusetts? Whether you're growing your family or settling down for career opportunities, you need to know your way around mortgage interest rates. Here's what to understand.
What Role Do Current Mortgage Interest Rates Play in Your Home-buying Process?
Current mortgage interest rates can impact your home-buying experience in a few ways.
The Basics
Mortgage interest rates determine your monthly mortgage payment. Higher interest rates will result in a higher monthly payment, while lower interest rates will result in a lower monthly payment.
Trying to Do More With Less Money
Borrowing is designed to stretch your purchasing power, but it's not a perfect solution. It's important to remember that the interest that comes along with a mortgage ultimately increases your total financial obligation.
Current mortgage interest rates are the main determiner of how much interest you'll pay over the life of your loan – and small variations do matter. If you're considering a 30-year mortgage, then a mere 1 percent difference in interest rates could result in thousands of extra dollars in interest payments.
Mortgage interest rates change over time, and this may have an additional impact on your monthly payments. If you have a variable-rate mortgage, for example, your monthly payments will increase if interest rates rise.
Never overextend yourself or count on interest rates to stay steady. Always think realistically about your ability to make higher payments in the future. Be sure you're saving enough to have a safety net to offset employment gaps or emergencies.
The Buying Experience
Mortgage rates can also influence how competitive sellers are during negations. Because rates impact people's purchasing power, they play a big role in how fast homes sell.
In a market where homes are selling quickly, sellers may be less likely to negotiate on price – They know they’ll likely receive multiple offers because rates are favorable.
In a market where homes are sitting on the market for longer periods of time, sellers may be more willing to negotiate on price to secure a buyer.
Mortgage Interest Rate Definition and the Factors That Influence Its Change
A mortgage is a loan used to purchase a property, which serves as their security. In other words, if the borrower defaults on the loan, the lender can foreclose on the property and sell it to recoup the loan amount.
A mortgage interest rate is the rate of interest charged on a mortgage. They can be fixed – meaning they're constant for the whole mortgage repayment term – or variable.
Many factors can influence mortgage interest rates, including the economy, inflation, and the Federal Reserve:
The economy is perhaps the most important factor. Strong economic growth usually leads to higher interest rates, while weak economic growth can result in lower interest rates.
Inflation is another important factor – higher inflation rates can lead to higher mortgage rates.
Finally, the Federal Reserve can influence consumer mortgage rates by adjusting the rates that banks and lenders pay to borrow money, ultimately impacting the entire economy.
Remember that average mortgage interest rates aren't a guaranteed indicator of what you'll pay on your loan. Your specific rate depends on numerous factors including your credit score, income, the equity of your home, and as we'll explore next, the type of loan you're applying for.
Introducing the 30-Year Fixed Mortgage - The Most Popular Option for Home Buyers
The 30-year fixed mortgage is one of the most popular options for home buyers. It offers a fixed interest rate for the entire term of the loan, which makes budgeting and planning easy. Additionally, the monthly payments are usually lower than they would be with a shorter-term loan.
Of course, there are trade-offs here. For starters, you’ll pay more interest over the life of the loan. You also won't be able to take advantage of lower rates if they fall.
You'll also have to wait longer to build equity in your property. Since the bulk of your initial payments will only cover the interest, you won't be able to pay down your principal amount as quickly.
Despite these drawbacks, 30-year fixed mortgage loan terms appeal to home buyers due to their flexibility. For many, the lower payments can even make it easier to afford more expensive properties.
Not interested in upgrading to a bigger house? The extra wiggle room could still prove useful. For instance, you might use the money you save to prepare for retirement, build a college fund, maintain your new property, or just keep something in reserve for emergencies.
One of the biggest benefits of having a 30-year fixed mortgage rate is that it becomes much easier to budget. Although there's no accounting for property taxes, insurance, and other variable homeownership costs, not having to recalculate your loan payments is definitely a major stress reliever.
How Different Types of Loans Compare to One Another
There are a few different types of loans available to home buyers. The most common are fixed-rate loans and adjustable-rate loans. Fixed-rate loans have an interest rate that remains the same for the entire term of the loan, while adjustable-rate loans carry interest rates that can fluctuate with the market.
Government-Backed Loans
There are also numerous government-backed loans, like FHA loans and VA loans. These loans often come with more favorable terms, like lower down payments and interest rates for people like veterans, military service members, and public servants. They may also have stricter eligibility requirements, however, and navigating these hurdles isn't always straightforward.
Your Financial Habits Matter
Also, remember that your current consumer habits should inform your borrowing process. Are you the type of person who pays their bills and saves as a matter of habit or someone who struggles with managing monthly expenses? Are you already burdened with lots of debt?
The mortgage you pick is more than just principal, interest, and a repayment time frame, so look at it holistically. Your lending terms should complement your lifestyle and help you move up in the world instead of making your existence more stressful.
Anyone who's looking to buy a home in Massachusetts should know that what works for one person might not work for another. Each type of loan has its own advantages and disadvantages, and there's no catch-all strategy for borrowing responsibly. In other words, it's important to consult with a financial advisor or mortgage lender to figure out which type of loan is best for your situation.
How to Make Sure You're Getting the Best Deal for Your Home Loan
There are a few things you can do to ensure you're getting the best deal for your home loan. You don't have to use every single one of these tips, but experimenting with at least a couple will definitely broaden your perspective:
Go Window Shopping
Mortgage lenders want to stay competitive, so they offer different rates to attract borrowers. Make sure to shop around and compare rates from multiple providers.
Each lender has its own criteria on what makes a good loan, like the type of mortgage, the property being bought, the size of the down payment, and your credit score. Although there's no true apples-to-apples comparison, exploring different companies by getting quotes is a convenient way to play the field.
Try Getting Preapproved
It might also be a smart idea to get pre-approved for a loan. This will clarify how much you can afford to borrow, and it can also make the real thing feel less frightening.
One caveat to seeking preapproval is that this process usually involves a hard credit inquiry. In other words, it will decrease your score by a small amount. Even though this dip is typically no more than five points, it's not something you want to do repeatedly.
Preapprovals are good for 90 days and require you to submit documents attesting to your financial status. If you'd rather not risk the hard credit inquiry or go to all the trouble, you can try getting prequalified instead. Just know that pre-qualification is only an estimate, not a formal offer from a lender.
Get to Know Your Lending Terms
Be sure you understand the entire cost of borrowing. For instance, you should ask about any fees or closing costs associated with loans to avoid getting caught off guard.
This is just as important as reading the fine print before signing anything – Not all lenders are the same, so get informed.
Prepare Yourself for What Lies Ahead
The mortgage application process can be a bit daunting. Big purchases are stressful to begin with, and having to jump through a lender's hoops doesn't help.
Luckily, there are a few simple steps you can take to prepare yourself:
Save for a deposit. Putting down more money will decrease your loan principal and total interest payments. Now might be the time to ditch those unused subscriptions, monthly memberships, and luxury purchases.
Gather all the necessary records, including your tax returns, pay stubs, and bank statements. Make sure the names match on these documents before applying.
Check your credit score and report for any errors. Correcting mistakes before getting a quote could significantly improve your borrowing power – not to mention reduce the number of credit checks you need to go through. Don't be afraid to call the credit reporting agency or file a complaint with the CFPB if something seems wrong.
If you take the time to prepare in advance, the mortgage application process will be much easier – and knowing current Massachusetts mortgage interest rates is the first step. Talk to us for more great tips and pointers, and happy borrowing!
