In some cases, it makes more sense to put extra cash toward your down payment instead of discount points If a larger down payment could help you avoid paying PMI premiums, for example.
A good mortgage rate is one where you can comfortably afford the monthly payments and where the other loan details fit your needs. Consider details such as the loan type (i.e. whether the rate is fixed or adjustable), length of the loan, origination fees and other costs.
That said, today’s mortgage rates are near historic lows. Freddie Mac’s average rates show what a borrower with a 20% down payment and a strong credit score might be able to get if they were to speak to a lender this week. If you are making a smaller down payment, have a lower credit score or are taking out a non-conforming (or jumbo loan) mortgage, you may see a higher rate. Money’s daily mortgage rate data shows borrowers with 700 credit scores are finding rates around 3.6% right now.
What credit score do mortgage lenders use?
Most mortgage lenders use your FICO score – a credit score created by the Fair Isaac Corporation – to determine your loan eligibility.
Lenders will request a merged credit report that combines information from all three of the major credit reporting bureaus – Experian, Transunion and Equifax. This report will also contain your FICO score as reported by each credit agency.
Each credit bureau will have a different FICO score and your lender will typically use the middle score when evaluating your creditworthiness imp source. If you are applying for a mortgage with a partner, the lender can base their decision on the average credit score between both borrowers.
Lenders may also use a more thorough residential mortgage credit report that includes more detailed information that won’t appear in your standard reports, such as employment history and current salary.
What is the difference between the interest rate and APR on a mortgage?
Borrowers often mix up interest rate and an annual percentage rate (APR). That’s understandable, since both rates refer to how much you’ll pay for the loan. While similar in nature, the terms are not synonymous.
An interest rate is what a lender will charge on the principal amount being borrowed. Think of it as the basic cost of borrowing money for a home purchase.
An APR represents the total cost of borrowing the money and includes the interest rate plus any fees, associated with generating the loan. The APR will always be higher than the interest rate.
For example, a loan with a 3.1% interest rate and $2,100 worth of fees would have an APR of 3.169%.
When comparing rates from different lenders, look at both the APR and the interest rate. The APR will represent the true cost over the full term of the loan, but you’ll also need to consider what you’re able to pay upfront versus over time.
How are mortgage rates set?
Lenders use a number of factors to set rates each day. Every lender’s formula will be a little different but will factor in current federal funds rate (a short-term rate set by the Federal Reserve), competitor rates and even how much staff they have available to underwrite loans. Your individual qualifications will also impact the rate you are offered.
In general, rates track the yields on the 10-year Treasury note. Average mortgage rates are usually about 1.8 percentage points higher than the yield on the 10-year note.
Yields matter because lenders don’t keep the mortgage they originate on their books for long. Instead, in order to free up money to keep originating more loans, lenders sell their mortgages to entities like Freddie Mac and Fannie Mae. These mortgages are then packaged into what are called mortgage-backed securities and sold to investors. Investors will only buy if they can earn a bit more than they can on the government notes.