A Beginner’s Guide to Mortgage Rates

If you are thinking about buying your first home, you will likely be looking to finance the purchase with a mortgage loan. There are many different home loan solutions available to today’s first-time home buyers. You will want to ask your lender about the advantages and disadvantages of conventional loans, FHA loans, VA loans and USDA loans. You will want to understand the qualification standards, including your credit rating (FICO score), debt-to-income (DTI) ratio and down payment. Lastly, you will want to know how mortgage rates work and how you can qualify for the lowest possible interest rate.

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What is a Mortgage Rate?

Your qualified mortgage rate is the interest rate that you will be paying on your home loan. Most home loans for first-time buyers are 30-year fixed-rate mortgages. This means your mortgage rate is the rate of interest you will pay over the 30-year term of your mortgage loan. You will make a mortgage payment each and every month that will consist of the following items (known as “PITI”):

  • Principal – The primary amount of your mortgage loan
  • Interest – The fee you are paying the bank for the loan
  • Taxes – Property taxes, if included with your loan payments
  • Insurance – Mortgage insurance (MIP/PMI) and/or homeowner’s insurance, if included with your mortgage payments

There may also be some lender-specific fees and/or escrow payments included based on your specific loan agreement and loan type. 

What is Mortgage Amortization?

As you make your monthly mortgage payments, you will gradually pay down your principal while paying interest to the bank along the way. Most mortgage loans are amortized in such a way that the interest payments are higher early on in the loan. During your first few years of making mortgage payments, most of your money will go toward interest rather than principal. 

Over time, the balance shifts. By the end of the 30-year loan, your payments are mostly principal. This is done to protect the mortgage lender in case you fall behind on payments and default on your loan. They are making sure to collect more interest fees in the beginning. Your monthly payment amount will stay roughly the same each year. It’s just the balance of where that money goes that changes over the life of the mortgage.

What is an APR?

You may also hear the term APR, which stands for “annual percentage rate.” Your mortgage rate is only one portion of your APR. It also includes broker fees, discount points (if applicable) and a portion of your closing costs expressed as a percentage. Be sure to ask your mortgage lender about how your mortgage rate and your APR affect monthly payments and overall lending costs of your home loan. Your mortgage rate will remain the same each year, but your APR can change slightly. This means your monthly mortgage payments may go up or down a little from year to year.

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Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages (ARMs)

Most mortgage loans are fixed-rate loans with the same interest rate for the entire 30-year loan. There are also adjustable-rate mortgage (ARM) options where your primary mortgage rate will adjust each year* based on prevailing economic factors. During times when average mortgage rates are higher, your interest rate (and thus your mortgage payments) will go up. The opposite is true when rates are down. ARMs are naturally a bit more unpredictable. Sometimes they work out in the homeowner’s favor and sometimes they don’t. 

*Most adjustable-rate mortgages will have a fixed introductory rate for the first several years (usually 5-7 years) before the adjustments start happening in subsequent years. They will also generally have a rate cap to prevent it from going up past a certain point, though there is usually plenty of space for your mortgage rate (and payments) to rise quite a bit before hitting the cap. 

Qualifying for the Lowest Mortgage Rate

As a first-time home buyer in Atlanta, you will want to qualify for the lowest possible mortgage rate when applying for your home loan. Your finances should be in order and there are steps you can take before buying to improve your borrowing situation. A better financial standing will help you qualify for a mortgage loan and lock in a lower rate.

There are several factors that your mortgage lender will review to determine your qualified mortgage rate:

  • Credit History – A higher credit rating (FICO score) will help you get a lower mortgage rate.
  • Debt-to-Income (DTI) Ratio – Having lower existing debt payments and a higher income will help you get a lower mortgage rate.
  • Down Payment – A higher cash down payment will help you get a lower mortgage rate.
  • Discount Points – You can also apply cash to purchase mortgage discount points, which will directly lower your mortgage rate. 
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In addition to your personal qualifying factors, the overall mortgage market (prevailing average rates during the time of your application) and your loan type (FHA, VA, USDA, conventional, jumbo, etc.) will play a role in determining your mortgage rate.

We’re just scratching the surface with the information above. First-time home buyers will want to take the time to understand how their mortgage loan will work and the steps they can take to qualify for the lowest mortgage rate. Start by talking with a reputable mortgage lender. Listen to their advice, but please ask a lot of questions and make sure you know what you need to know.

First-time home buyers can contact Moreira Team We’ll be happy to answer your questions and help you navigate the mortgage lending process.