Mortgage rates are assigned to each homebuyer according to their financial history and the federal interest cap. And while it's impossible to do anything about the latter, Roxboro new home buyers may be able to save money on the former once they know how the rates are determined. Canadian real estate has inflated in the past decade, leaving lenders to come up with new ways to protect themselves from default without alienating their customers. See how everything from amortization formulas to credit scores factor into an interest rate.
Interest Is Key
In the first months of paying a loan, buyers are spending a significant chunk of their monthly payments on interest. This is because interest is charged on the principal of the loan. The higher the principal, the more interest a homeowner pays. Now is a good time for homeowners to estimate their personal amortization formula—well before settling on a price range for their dream home.
This formula refers to exactly how much money a person will pay over the lifetime of the loan based on semi-annual compounding rates. A financial or real estate expert can make it easier to determine the total amount, depending on how complicated the loan is. For example, a fixed-rate mortgage may be relatively straightforward to determine, but an adjustable-rate mortgage may take more work. The formula for amortization accounts for the principal of the loan, timeline, and interest rates.
Paring Down the Debt
A $250,000 home can quickly cost a homeowner more than $400,000 at the end of a 30-year mortgage, and that's regardless of whether the home appreciates in value. This is just one of the reasons why a large down payment can set the stage for how much money a homeowner spends over time. As difficult as it may be to put down 20% or more, the payoff is worth it in the long run.
Fixed Vs. Adjustable
Lenders will usually offer one of two types of interest rates to buyers. An adjustable-rate mortgage (ARM) will usually present the most attractive terms to buyers, but the low rates don't necessarily make it a good buy.
An adjustable rate is based on a number of different factors—many of which the buyer has no control over. If the economists and politicians of the day decide that the economy is doing well, rates could be raised significantly. It only takes a fraction of a percentage point to cost an extra tens of thousands of dollars over the course of a 30-year loan. Of course, if rates drop, then a person can save just as much.
A fixed rate mortgage will typically have higher interest rates, but it also offers more stable security. As a bonus, homeowners know exactly what to expect from year to year, which is great for anyone who likes to budget (and all homeowners should like to budget). On average, an owner may pay less over time if they choose a fixed-rate mortgage.
One basic rule of thumb is for buyers to choose fixed-rate if they have no intention of leaving the home anytime soon. If buyers are moving into a temporary residence (e.g, for a short-term job) or purchasing a starter home, it may make more sense to choose an ARM because it offers better rates upfront.
Lenders and Buyers
There are a few more lender facts to consider before settling on a rate:
- Lenders Mortgage Insurance (LMI): LMI is an insurance policy for lenders that covers expenses if a buyer should default on their loan. It's typically required for a homebuyer who can't put down at least 20% of their down payment. LMI is the real estate industry's solution to higher interest rates. Buyer default can be crippling for a lender because the organization still has to arrange the sale of the property (and may have to do so at a loss). Without PMI, rates would have to be raised across the board.
- Open and Closed: Closed mortgages are a type of lender product with lower interest rates, while open mortgages have higher rates. Open mortgages offer more flexibility for the buyer if they need to move unexpectedly, while a closed mortgage may charge breakage costs in addition to the higher rates. These mortgages are similar to ARM and fixed-rate mortgages but may offer better terms for the buyer, depending on what they're looking for.
The concept behind interest rates is easy to understand: the more homeowners can pay off the principal of their loan, the less money they'll pay in interest. However, successfully navigating the lending space takes a little more understanding of the available options.