Buying a home is a big financial decision. Whether this is your first time buying a home or your fifth, its still complicated to understand all the terms of your loan. Since most of us cant afford to purchase a home outright in case, a home loan helps us manage these costs. Its up to the buyers to understand the home loan rates and terms before purchasing a home. Buying a home can be complicated at times, and it seems like the transaction is written in terms only a mortgage professional would understand. Keep reading for a breakdown of your home loan rates so you know what youre getting yourself into before you sign on the dotted line.
Loan Rate Terms
Whether youre looking at mortgage rates or home improvement loan rates, youll need to understand the terms before you can confidently make a decision. Here are the rate terms youll likely see on a loan:
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage is a loan which has a low interest rate to start, but this rate will change as the market changes. This will come with limitations on how often the rate is able to increase over the entire life span of the loan. As the interest rate goes up, youll also expect to see your monthly payment go up. These types of loans might seem appealing at first due to the low introductory rate, but be aware of possible market fluctuations.
Annual Percentage Rate (APR)
This rate is the rate of interest that will be applied to the home for the entire year.
This term is self-explanatory. Collateral on the loan is what the bank is eligible to collect if you fail to pay the loan and default. In the case of a mortgage, the collateral is the home itself.
Unlike an adjustable rate mortgage, a fixed-rate mortgage has the same set interest rate for the entire life of the loan. In these types of loan situations, you will not need to concern yourself with potential market changes throughout the life of the loan.
The principal is the amount you originally borrowed on the loan. If you choose to pay down the principal, you are paying down the cost of the loan instead of paying off any interest.
Term is another way of saying the length of the loan. Its common to have a 10, 15, or even 30 year mortgage depending on your terms.
How are These Rates Determined?
Now that you understand the different rates and terms associated with home loans, youre wondering how lenders determine these numbers in the first place. It comes down to a number of factors listed below. Always feel empowered to talk to your lender about the best way to reduce the cost of your loan and the best financial options for your situation.
Your credit score is a large factor in determining your loan rates. Your credit score will take into account any outstanding loans, your credit history, and your payment history. The higher your credit score is, the more likely youll qualify for a lower mortgage rate.
How much are you able to pay upfront on your home loan? In general, the more you are able to pay upfront as a down payment, the lower your mortgage rate will be. Look into the right loan program for you and research discount options if you qualify.
Price of the Home
You might notice you receive different loan offers depending on the price of the home. This is because large loans carry more of a risk for mortgage lenders, thus resulting in a higher mortgage rate. This is why its essential to purchase a home in your spending range to avoid a mortgage rate that is too high.
Mortgage rates seem to be intentionally complicated, but they dont have to be! Understanding a few key terms and how they affect you is the first step in making the right decision. Purchasing a home in a large financial decision, so be sure to talk through your options with a lender and always do your research!