Not Only Mortgage Interest Rates Affect Your Payment

We all keep a close eye on mortgage interest rates when shopping around for a mortgage. After all, the interest rate on your mortgage has a dramatic effect on your monthly payment. Even a small difference in your mortgages interest rate can have a large impact over the life of your mortgage.

We would like this rate to be as low as possible, simply because the lower the interest rate the more buying power. However, there are several additional factors that will affect your interest rate. Some of these factors are completely out of your control, while others can be controlled.

Interest rates in the United States are controlled by the Federal Reserve (The Fed). The Federal Reserve adjusts interest rates up or down in an effort to keep inflation down, and the economy strong. The rate adjustments made by the Fed are one of the factors that are out of our hands. So there is no point in worrying about them.

Instead, place your focus on those factors that are within your control. First off, decide whether you prefer a fixed-rate mortgage, or an adjustable rate mortgage (ARM). An ARM will start off with a lower interest rate, but will rise or fall with the adjustments made by The Federal Reserve. A fixed rate mortgage has a slightly higher rate, but remains at that rate for the length of your mortgage leaving you protected against any interest rate hikes.

You may also have to pay discount points in order to lower your interest rate. Paying one point is equal to paying 1% of the amount borrowed. For example, if you were borrowing $100,000, paying one point would cost you $1,000.

The discount as a result of paying points will vary from lender to lender, but are usually around a quarter of a percentage point for every discount point payed. For example, should you pay one discount point your 6.50 interest rate would be lowered 6.25 percent.

Now before rushing to pay discount points in order to lower your interest rate, you must consider how long you plan to live in the home. Compute and compare the numbers both with and without the points. This will clearly show you which is the better deal.

Another option you can control is the length of the mortgage loan. You may choose a fifteen year mortgage over a thirty year mortgage. This fifteen year election will come with a lower interest rate than the thirty year mortgage. Bear in mind that the payments will be substantially higher as a result of paying your loan back over a much shorter term.

The best thing you can do when shopping for a mortgage is to help keep the offered interest rate down by staying on top of your credit report. The higher your credit score the more favorable interest rate you will qualify for. Be sure to obtain a copy of your credit report, check it for errors, and fix any mistakes to clean up any possible black marks. Make sure to pay your bills on time. It only takes a few late or missed payments to have a major impact on both your credit score, and on your interest rate.

Copyright &copy2007 Carl DiNello