Home Loan Calculators and Interest Rates
The mortgage interest rate is the fee that lenders charge in exchange for borrowing the money to purchase your home. Homeowners prefer lower interest rates because it saves them money over the life of the loan. Many factors influence the interest rate, including:
Your credit score
Mortgage term length
Interest rate type
Your Credit Score
Your credit score is a measure of how creditworthy you are. It might be higher if you have a history of on-time payments and have a low debt balance. If you miss payments and rack up a large balance on your credit cards, your credit score can drop. Generally, banks give lower interest rates to borrowers with higher credit scores.
Mortgage Term Length
Mortgage term length is the number of years it will take you to pay back the money you borrow to purchase your home. The most common mortgage terms are 15 or 30 years. Banks view longer terms as riskier because there’s a higher chance that you’ll default on your loan. Thirty years is a long time, and you could lose your job, get divorced, or suffer ill health. That’s why a 15-year mortgage loan typically has a lower interest rate.
A 15-year term can also save you money because you’re paying interest for half the time compared to a 30-year term. If you’re shopping for a new home, use a mortgage payment calculator to compare the cost of different term lengths to see how much you could save by opting for a 15-year term.
Interest Rate Type
Mortgage loans have the option of two types of interest: fixed and adjustable. A fixed- rate loan has the same interest rate for the entire repayment period. It can provide more stability because your payment amount stays the same from month to month. With an adjustable-rate mortgage (ARM), the interest rate can go up or down depending on market conditions.
ARMs have an initial period where your interest rate remains the same. However, after the initial period expires, your rate can vary significantly from month to month or year to year. Because your total payment includes interest fees, the dollar amount can go up or down. Fluctuating payments can make budgeting difficult. If you opt for an ARM, refinancing to a fixed-rate mortgage might make sense if the rate climbs too high or you want a more stable payment.
Economic conditions play a role but can be unpredictable. Government financial policy and supply and demand can cause interest rates to change. For instance, 2020 saw a drastic change in interest rates because of the coronavirus pandemic. Businesses were forced to shut down, causing a high unemployment rate and a slow economy that couldn’t have been predicted. The Federal Reserve made a few quick changes that put pressure on rates, and mortgage rates dropped to historic lows.