Rebecca Richardson - Mortgage Consultant
What’s The Deal With Mortgage Rates?
When you get your pre-approval, there are two numbers that will jump off the page: the monetary amount that you’re pre-approved for and your estimated interest rate. There’s a lot of emphasis put on that percentage, but still some mystique surrounding those rates and the impact they have on your mortgage payment.
In the blog below, we’ll give you an overview of the factors that determine your interest rate, the process of buying down your interest rate, and the impact of refinancing to a lower rate.
What Moves Mortgage Rates?
When you’re consuming information about the housing market, it’s likely with an emphasis on mortgage rates rising and/or falling. That pesky percentage can have a big impact on your monthly mortgage payment and, in turn, your buying power.
So, what makes those mortgage rates move? There are a multitude of factors, but we’ll keep it simple for you.
Mortgage rates are directly tied to the economy. Factors like the rate of economic growth, inflation, and the Federal Reserve’s monetary policy directly impact whether mortgage rates rise, fall, or stay the same. To keep it simple, when the economy is doing well, there is typically more demand, which drives rates up. When the economy is struggling, the opposite happens. This is because lenders only have so much capital to lend.
Outside of the ebbs and flows of the economy & various markets, you have a direct impact on your mortgage rate as well. The best mortgage rates go to individuals who have stellar credit histories and strong financial backgrounds.
Things like your credit score, current debts, and even the type of loan you receive for your home can determine how high or how low your interest rate can be. So, no matter what’s happening outside of your control within the economy, it’s extremely important to make sure your financial picture is as healthy as possible.
Is Buying Points Worth It?
There’s a lot of emphasis that’s put on getting the lowest possible rate when shopping for a home. Many individuals think that a ‘good’ mortgage means having the lowest possible rate. So much so that individuals will pay extra to buy ‘points’ to get a lower rate.
Mortgage points are fees that a homebuyer pays their lender to lower the interest rate on their loan. These are lump sums used for pre-paid interest. A point costs 1% of the mortgage amount and typically lowers the interest rate on a loan by 0.25%. Buyers have the option to purchase as little as a fraction of a point or even up to three points.
So, is buying points worth it? With all things related to the homebuying process, it depends on your individual situation.
If you think you’ll sell your home or refinance before a certain threshold of time passes, the amount that you’re paying in points could mean that you’re not saving enough in the time that you own the home to justify the cost. On the flip side, if this is a home you plan to live in for a while or potentially convert into a rental property when you decide to purchase your next home, it could make sense.
As always, one mortgage doesn’t fit all. Your individual situation is unique, and what might be ideal for one borrower could be the opposite for you. Buying a home is likely the largest purchase you will make in your life, so it’s crucial to work with an experienced and trustworthy lender who will prioritize your best interests.
How Soon Can You Refinance?
Let’s paint a hypothetical picture: you buy your home, then, a few months later, mortgage rates drop below the rate that you’re paying on your current mortgage. How soon can you refinance to get that lower rate? And more importantly, would it be worth it to refinance?
Well, it depends.
Generally, you have to pay your mortgage for at least six months before you can refinance. This can vary from loan to loan, but half a year is most common.
When you’re considering refinancing, focus more on the impact that a new rate would have on your monthly payment rather than the percentage difference of your old rate vs. the potential new rate.
Another thing to keep in mind is the total cost to refinance. Refinancing can carry the same costs as the initial purchase of your home, with closing costs, processing fees, and other factors such as an appraisal contributing to your bill. A lower interest rate & monthly payment can be tempting, but the costs of getting that lower rate could cancel out any of those savings that you’re working for.
There’s so much more to your mortgage than just the interest rate. If you’re looking to learn more about that percentage associated with your mortgage, whether it makes sense to buy down your rate, or if a refinance is a sensible option, feel free to reach out to my team! We’re more than happy to help give you personalized advice to help you make the decision that works best for you.