How Do Mortgage Interest Rates Work?

June 18, 2021
Integrity First Lending

You may have heard that mortgage interest rates are at historic lows. It’s true, and it’s a good time to buy a home in Utah — or anywhere, for that matter. But why do interest rates vary? Why are they not the same every day for everyone? The mortgage lenders at Integrity First Lending explain how to determine what kind of mortgage interest rate in Utah you can expect.


Mortgage Interest Rates and Terms

One aspect of mortgage lending that has a big effect on mortgage interest rates is the term of the loan. The term is how long you will pay on your loan. Common loan terms are 15, 20, 25 and 30 years. When you Google “mortgage interest rates today,” the first number that comes up is usually for a 30-year loan, since these are most common.

Interest rates go down as the term gets lower, with a 15-year term being the lowest. The reason these rates are lower is because the mortgage lender doesn’t have to wait as long to get their money back.

Fixed-Rate Mortgages vs. ARMs

A fixed-rate mortgage stays the same throughout the life of your loan. Whatever rate you got when you took out the mortgage is the rate you keep. The only way to change it is to refinance your loan. Many homeowners refinance when rates fall, taking advantage of lower interest rates. If they shorten the term of their loan at the same time, they could save even more.

An ARM, also known as an adjustable-rate mortgage, fluctuates with the market. If interest rates go up, your interest rate will go up. If rates go down, your rate will go down. Many people dislike the uncertainty of not knowing how, when or if their mortgage payment will change and if they will be able to afford it.

The good part about an ARM is that when homebuyers agree to this type of rate, they usually get a lower introductory rate that is locked in for a period of years. As this period expires, homebuyers can refinance and get a fixed-rate mortgage or a new ARM with better rates.

Your Credit Score & History

Regardless of whether you choose a fixed-rate mortgage or an ARM, or what the term of your loan is, your interest rate may be affected by your credit score. Homebuyers with good credit scores will get the lowest interest rates. Those with poor credit scores may not get home loan approval at all, and those in the middle may be approved, but at a higher interest rate.

Your mortgage interest rate is tied to risk. If your credit score is mediocre, the mortgage lender is taking a bigger risk by expecting you to make your payments in full and on time than they would with someone with a higher credit score. If you’re not in a big hurry to purchase a home, you may want to wait six months to a year for your credit score to improve enough to help you get a better mortgage rate in Utah.

For more information about mortgage rates or to apply for a home loan, home equity loan or to refinance your home in Utah, talk to the friendly, helpful team at Integrity First Lending.

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