When you receive a loan from a lender to help pay for your house, you will have to pay off your mortgage every month. These payments will be split up into two parts: the principal and the interest. The principal is the amount you borrow from the lender to pay off the house, whereas the interest is the fee the lender charges for borrowing that money.
The interest rate you secure is very important because it will determine how much you must spend on your mortgage payments each month and over the entire lifetime of your loan. The higher your interest rate, the more you will have to spend while paying off your mortgage. The frequency of changes to your mortgage rate depends on the type of mortgage you choose.
Fixed mortgages lock in the same interest rate for a set term. Most mortgage terms are five years or less. Every time you renew your mortgage term, your mortgage interest rate will be renegotiated. Alternatively, variable mortgages have interest rates that fluctuate according to national trends.
How Interest Rates Affect Your Mortgage Options
Lenders typically set mortgage rates on a case-by-case basis, and the rates you receive will be based on various factors. Some of these factors depend on you, such as your borrowing history and the property you purchase. Other factors are out of your control, such as the impacts of the current economic situation and the central bank. The lowest interest rates are typically the best since lower rates will save you money on both a short and long-term basis.
If you are looking to secure a mortgage loan, you will be considered a mortgage investor. As such, you will likely have to deal with either a mortgage loan originator (MLO) or a mortgage aggregator. An MLO is a person or institution that can help you get the right mortgage for the purchase of your house.
MLOs are often employed by either a bank or a mortgage company. On the other hand, mortgage aggregators are accredited loan-writing businesses that provide mortgage brokers with access to securitized mortgage options. In most cases, either the bank issuing you the mortgage or a subsidiary within the financial institution is considered the aggregator.
As the mortgage investor, you have a significant role in determining its interest rates you will be offered. One of the primary factors affecting the rates offered to you is your credit score. Lenders may also look into your banking history, loan history, and debt-to-income ratio (DTI). The type of property you are buying, the size of your down payment, and the loan term that you choose will all impact your mortgage rates.
Of course, the type you choose can affect your rate as well. Adjustable-rate mortgages tend to have lower interest rates than most fixed-rate mortgages. Most major lenders in Canada offer adjustable-rate mortgages that are about 0.90% lower than their fixed rates.
What determines your interest rate?
Multiple factors are considered by lenders when figuring out your interest rate. The lender’s main focus is determining how much of a risk you are when it comes to paying back your loan. If they decide you are a low risk, they will likely give you a better interest rate.
Your credit score is one of the main factors that is considered. The higher your credit score is, the better your interest rate will be. Your interest rate can also be lowered by paying a higher down payment, choosing a shorter mortgage term, and opting for a variable mortgage rate rather than a fixed one. Even the location of your house plays a part since factors like the health of the housing market within your area can affect your interest rate.
How to Handle Rising Mortgage Rates
It can be concerning when a trend of rising their rates begins to become noticeable. Fortunately, there are lots of different ways you can protect your finances in such a circumstance. One way you can do this is to find the best mortgage rate available and lock it in as soon as your loan is approved. This protects you against rising mortgage rates during the time between your initial approval and the closing of your purchase.
Locking in your rate for as long as possible with a longer-term fixed-rate is another good idea. That way, you can put off paying a higher rate for as long as possible. You may also want to consider buying discount points, which will allow you to prepay for some of your interest charges. These points can lower your interest rate by up to 0.25%. Depending on your lender, you may be allowed to buy anywhere from a fraction of a point to three points. If you can make a larger down payment on your house, that could also drop your interest rate considerably.
As well, improving your credit score would be wise since those with scores in the 700-900 range typically get better rates. Lastly, opting for a shorter repayment period could save you money because paying off your mortgage faster means paying less interest overall.
Why Interest Rates Matter
There are many things to consider while choosing a mortgage; however, finding a good interest rate is undeniably one of the most important factors of all. Finding and securing the lowest rate possible will help you save a considerable amount of money while paying back your loan. Of course, the process that goes into determining interest rates can be complex and involve many factors.
Though some of those factors may be out of your control, many of them can be influenced by you and your decisions. Even when rates are rising, you can protect your finances in various ways, such as lowering your credit score, making a larger down payment, locking in your interest rate, and buying discount points. Ultimately, the amount you end up spending on your mortgage is in your hands.
Author
Jessica Coates is a blogger in Toronto. She graduated with honors from the University of British Columbia with a dual degree in Business Administration and Creative Writing. Jessica Coates is a community manager for small businesses across Canada. When not working, she leisurely studies economics, history, law and business solutions.