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First-Time Homebuyers: How Mortgage Interest Rates Work

5 May 2017

Mathéo Gerard

For a first time home-buyer, the way mortgages work can often become confusing. Most people know a mortgage represents a loan from a bank they will pay back over time. However, once talk turns to things like amortization and fluctuating variable rates, that straightforward view of how mortgages work can become a little muddled.

How Lenders Set their Interest Rates

Mortgage interest rates can vary broadly among lenders. Many of the things that decide interest rates happen in the background, so you won't have any control over that part. For example, local and even world economic factors will play a role in the interest rates set by larger financial institutions. The rates set by those larger institutions will play a role in how smaller lenders set their rates. The factors that dictate rates change every day, so rates are never set in stone.

What it means for you

This all means you have to shop around when seeking a good mortgage rate. Don't assume the rates you initially come across represent the rates all over. Beyond that, rates change all the time, so don't think when rates are high across the board they will stay that way.

If you can't find rates that appeal to you, consider holding out for a little while. You may come across a better rate later, but don't wait too long. If you find a good rate that you can work with, then take it.

The Types of Loan Interest Rates Lenders Offer

Lenders offer quite a few different types of loan rates. You may see them under various names, but in almost all cases, they fall into one of two categories.

Fixed rate mortgage loans

A fixed rate loan will not change for the length of the mortgage term. It's stable, and if you lock it in when it's low, it's one less worry.

Understand that if you start with a rate that doesn't change, then your own financial situation will have to remain the same along with it. For example, if you lock in a rate that's too high, and ten years later you lose your job, then that rate will become a hardship.

Adjustable or variable rate mortgage loans

These types of rates can change over time. There's many ways in which they can change. Occasionally, they will change at specific dates to whatever the lender's current rates are.

Variable rates can come off as something of a wild card for many people. You may find yourself with excellent rates later, or they can grow. It's something of a gamble, but does allow for a lot of flexibility. Adjustable rates often start lower than fixed rates.

There's also many financial products out there that fall somewhere between these two types of rates. For example, a lender may offer a fixed rate that will come up for refinancing or renegotiation after a period of time. Other options includes rates that will go down when rates lower, but not go up beyond the original rate.

Pay Close Attention to a Mortgage Lender's Products

Several other things can influence your mortgage rates. Your own financial situation will play a role, such as your creditworthiness and how much of a down-payment you have. No matter what, pay close attention to the terms offered by lenders. Make sure you read the fine print and have a good understanding of exactly what's expected of you.

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