Buying a new home is an exciting endeavor, and it’s also one of the biggest financial purchases you may ever make. With this in mind, it’s extremely important to find the best mortgage interest rates possible.
When mortgage lenders are assessing borrowers, they consider several different factors to determine rates. While not all of these factors are weighted equally, they all play a role in how much your new home is going to cost.
Let’s take a look at some 7 factors that influence mortgage interest rates. Understanding these key points will help you score the best possible rate on your next home purchase.
1. Credit Score
It probably isn’t surprising that your credit score plays a role in your mortgage interest rate. But it doesn’t just influence the rate you receive: it can also determine whether or not you will even qualify for a mortgage.
As you might expect, the higher your credit score, the better the chances you’ll have of snagging the lowest mortgage rate. Many lenders say the best rates will go to anyone with a credit score of 760 or above. Then for every 20 points lower than that, there will be a small tick up in the interest rate.
Not sure what your credit score currently is? No worries. There are plenty of free tools available that will provide you with your credit score.
Once you know your credit score, you will better understand the kind of mortgage interest rates you might receive.
If your score isn’t as high as you’d like it to be, there are a couple of simple steps you can follow to give it a little boost.
Pay your bills on time.
One of the worst things you can do for your credit is to pay your bills late or even worse, not pay a bill at all.
Pay down your balances.
The amount of credit you utilize on a monthly basis makes up 30 percent of your credit score. By paying down the balances on your revolving debt, you can help push your credit score in the right direction.
2. Down Payment
How much money are you planning to put down for your new home? Would you be shocked to know that your down payment can affect the mortgage interest rates you receive? It’s true.
Lenders want to see borrowers put down as much as possible – this helps reduce the risk that the lender is taking on.
In most cases, you’ll need a down payment of 20 percent to qualify for a conventional loan. 20 percent has always been the aspirational down payment. Not only will 20 percent provide you with the best mortgage interest rates, but it will also help you avoid default insurance.
3. Fixed vs. Variable Rate Mortgages
When shopping for a mortgage, you can choose either a fixed rate or variable rate loan. A fixed rate loan is going to give you the ability to lock in at a certain rate for the life of the loan. This means the principle and interest you pay each month will never change.
Variable rate loans work a little differently. The rate can move up and down as frequently as every month.
If rates increase, more of the monthly payment will go toward interest. But if the rates decrease, a greater portion of the payment will go toward the principle.
Variable rate mortgages can be extremely attractive to home buyers because their rates are lower than that of a fixed rate mortgage.
However, during a period of rising interest rates, borrowers can end up with a mortgage where most of their monthly payment goes toward interest.
4. Mortgage Term Length
Both fixed rate and variable rate mortgages come with different terms ranging from 6 months to 10 years. The most common term for Canadian mortgage loans is 5 years.
So, what’s the difference? The shorter the term usually means a lower interest rate. But, be aware – this also usually means a higher monthly payment.
The most common variable rate mortgage is 5 years. For the 5 year period, the monthly payment amount will never change.
However, if rates increase from month to month, more of the payment will be applied to interest instead of the principle. Other variable rate mortgages include a 3-year term.
5. Open vs. Closed Mortgage
Canadian home buyers have the choice of either an open or closed mortgage. An open mortgage will give buyers flexibility. You can choose to pay off the mortgage balance early without penalty.
Unfortunately, the flexibility comes at a price. Open mortgages typically have higher variable rates.
Closed mortgages, on the other hand, are a little more restricting. If you choose to pay off your mortgage before the end of the term, you can expect to pay break fees. These fees can significantly eat away at the equity in your home.
Closed mortgages can be attractive to certain buyers because they typically have lower mortgage interest rates.
6. Shop Around
This might seem like a no-brainer, but shopping around for your mortgage can be one of the best ways to save money. You can get started by heading over to our mortgage page and filling in a few details.
When you get a mortgage there are going to be a lot of fees involved. You may have to pay everything from the lender’s origination fees to application fees, and even multiple third-party fees.
Yet, these fees can vary from lender to lender. Shopping around to find a lender that charges the lowest fees will also give you the opportunity to find a lender that offers the lowest interest rate.
7. Some Tips for You to Get The Best Mortgage Interest Rates
Now that we have talked about several different ways to get the best possible interest rate on a mortgage, let’s recap. Remember: if you meet all of these characteristics, you’ll have a better chance of getting the lowest mortgage rates possible.
- A credit score above 760 will usually always get some of the best rates, but shoot for 800.
- Plan to have a down payment of at least 20 percent. More would be ideal.
- Choose a closed mortgage.
- Opt for a variable rate mortgage if you are comfortable with the possibility that rates could increase in the future.
- If you prefer a fixed rate mortgage, choose a 1-year or 5-year loan instead of a 10-year loan.
- Take the time to shop around with multiple lenders to find the best rates and lowest fees offered.
Follow each of these tips and before you know it, you’ll be settling into your new home.