Mind the ebbs and flowsMacroeconomic conditions put pressure on lenders' cost of funds and on secondary market demand for mortgages-and both factors affect mortgage rates directly. While you can't overcome economic trends, you can minimize surprises by staying informed.
Honor thy APRThe annual percentage rate (APR) is a yearly interest rate calculation that includes all upfront loan costs. It's useful because it allows you to compare two loan programs that may have very different upfront costs. These costs aren't included in a loan's stated interest rate.
Check your credit scoreLenders use your credit score to assess the likelihood (or unlikelihood) that you'll pay back your debt on time. A lower credit score indicates a greater chance that you'll miss payments, or even default. The lender will therefore charge you a higher interest rate to compensate for that greater risk. On the flip side, a good credit score proves that you're responsible with debt, and earns you a lower rate.
Be wary of the toll road less traveledOption ARMs, interest-only mortgages, no-doc loans, and 100 percent mortgages are some of the more aggressive loan types out there. These programs may be appropriate for your situation, but they present more risk for the lender. Therefore, they'll cost you a higher interest rate.
FHA loans before choosing something more aggressive. If you must go with an unconventional mortgage loan, use a mortgage calculator to understand and evaluate the trade-offs.
- Ask your lender if you qualify for a conforming mortgage or FHA loan; these generally carry the lowest interest rates.
- When considering an adjustable-rate mortgage (ARM), pay careful attention to when the rate will reset and by how much. Know the limits on how much the rate can change at each reset, as well as throughout the life of the loan.
- Fixed mortgage rates don't make big swings in short periods of time. If you can't afford a mortgage at current interest rates, come up with an alternative plan: put off the home purchase or refinance, borrow some of the money from family, or pay off other debt.