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What is a mortgage?
For many, buying a home outright with cash isn't feasible. Instead, they opt for a mortgage, a loan used to purchase a home. Typically, buyers make a down payment ranging from 3% to 25% and secure a mortgage to cover the remaining costs. Mortgages are structured to be repaid over a set period, known as the term, with the most common term being 30 years. Each payment comprises principal and interest, along with property taxes and, if required, mortgage insurance. Principal refers to the original borrowed amount, while interest is the cost of borrowing the funds.
How do mortgage rates work?
The mortgage rate you're offered by a lender is influenced by a combination of factors, both personal and external.
Lenders typically set a base rate, considering broader economic factors and ensuring profitability. They then adjust this rate for individual borrowers based on their perceived risk. If you're viewed as a low-risk borrower, you're more likely to receive a lower interest rate offer.
Factors you can change:
- Your credit score: Lenders assess risk using credit scores, with higher scores indicating lower risk. A strong credit score signals to lenders that you're likely to make timely mortgage payments.
- Your down payment: A larger down payment reduces the amount borrowed and lowers risk for lenders. Calculating your loan-to-value ratio (LTV) can help gauge this; an LTV of 80% or more is considered high.
- Your loan type: Different loan types can impact the interest rate offered. For instance, jumbo loans often come with higher interest rates.
- Intended use of the home: Mortgages for primary residences typically receive lower interest rates compared to those for vacation properties, second homes, or investment properties.
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