There is no doubt in the fact that buying a home is a complicated process. Like most people, you’ll probably end up getting a home loan and you’ll have to get familiar with lots of new terms so you can have a better understanding of the entire process. Something that you should really pay attention to is interest rates, as they represent the amount you’re being charged for borrowing said money. Sometimes there are ‘hidden costs’ in your interest rates and other times you can actually negotiate these rates. Therefore, in order for you to get a better grasp of these, we’ll list 5 things you should consider when comparing home loan interest rates.
First and foremost, you should be aware of the fact that your credit score has a big impact on your interest rate. Generally, people with a higher credit score will get lower interest rates and people with a lower credit score will get a higher one. That means that your credit score is responsible for determining how reliable you are for a certain lender. Therefore, before you start looking for home loans, make sure there are no errors in your credit report, as it could make a big difference when it comes to calculating your interest rates.
The loan term is the period of time you’ll have to pay back all the money that you’ve borrowed. It’s only normal for your interest rates to depend on this aspect somehow. Generally speaking, if your loan term is shorter, the cost of your interest rates will definitely be lower. But if you sign a contract for a longer loan term, you should expect to pay more for your interest rates. Normally, you would think that the best choice would be to go for the shorter loan term, so you can pay less on the interest rates; but make sure to consider that if you go for a shorter loan term, the amount that you’ll have to pay monthly can be much higher.
Loan Amount and Down Payment
Keep in mind that before you start comparing interest rates, you should have an idea of what you can afford to borrow. The interest rates can be higher or lower, depending on your loan amount, therefore depending on the cost of the actual house. But your mortgage loan isn’t just the price of the house itself. You have to understand that the loan is the home price combined with closing costs, minus the down payment.
Speaking of down payment, if you can afford to pay more of it, your interest rate will most probably be less. That’s because lenders are risking less when you have more stake in a property. So the best thing you can do, if you don’t have a promising amount of money for the down payment, is to wait a while in order to raise more money. In the long run, it’s probably the best decision that you can make.
Interest Rate Type
Something that you should be extremely careful with, is the interest rate types. There are two types of interest rates: fixed and variable. The fixed interest rates, obviously, don’t change as time goes by; so you’ll pay the same amount of money throughout the entire loan term period. On the other side, if you go with variable interest rates, your initial rate can be lower. But over time, depending on the market, the adjusted interest rate can increase considerably.
Location and Lenders
Another factor that is responsible for determining the costs of your interest rate, is the location of a certain home. If you’re searching for a home in an urban area, you’re expected to pay higher interest rates; therefore you’ll pay less when you search in a rural area. You should also be aware of the fact that interest rates could also depend on the lenders. For houses in the same area (rural or urban), different lenders or lending institutions can offer different interest rates. So make sure to connect with multiple lenders so you can figure out which one best suits your needs and your budget.
The decision of getting a loan for buying a home is probably one of the most important that you’ll ever make. Therefore, there’s a lot of thought that you need to put into this matter; it’s definitely not a decision that you make in a day. Home loan interest rates are a big part of the entire process, representing a monthly expense that needs to fit in your budget from now on. That’s why it’s best for you to be aware of all the aspects mentioned above, so you’ll be able to compare home loan interest rates and settle for the best option.