Understanding Home Loans: Your Interest Rate

By Author: Ivan Cuxeva
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When you start shopping around for home loans you will notice that they vary slightly in several different areas but where they may vary quite a bit and what you will want to pay attention to is the interest rate of the loan. The interest rate of the loan determines, in large part, how affordable your monthly payment will be. When you are buying a home it is important to consider how affordably the monthly payment truly is because you could be making this same payment for as long as 30 years. When committing to a 30-year responsibility you want to get the best deal possible.

Understand Your Interest Rate

It's important when you are shopping for home loans that you understand where the interest rate comes from. Many lenders will try to hike up the interest rates a bit so they can make more money. If you understand where the interest rate comes from you can more easily determine if the rate is fair based on when you are buying the home, where you are buying the home, and your specific situation. Remember, the interest rate is really important and you simply cannot learn too much on this topic.

The ...
... thing that impacts your interest rate the most when shopping for home loans is the Federal Reserve discount interest rate. This may sound like gibberish to you, but you should know this because the lending institutions out there actually borrow money from the Federal Reserve Banks. This rate is important because this is what the lender is charged for borrowing the money and they will have to pass this onto you and then they will need to tack a bit more onto it so that they can make some money in the process. This is something that you have absolutely no control over so you should have this information but know that you cannot change it.

Another factor that will affect the interest rate in home loans that are extended to you is the lender that you are working with. You cannot forget when you are shopping for loans that lenders do not simply give you the money out of the goodness of their hearts. Instead, they are in business and they want to make money. The lender will take interest points on top of the Federal Reserve interest rates so that they can keep their money going. Their lending money to you is a risk so they need to have some security and make sure that they are making money off of every dime that they are lending to you.

The biggest factor that will affect your interest rate of home loans is your FICO score and your credit report. The FICO score is what a lender will look at to determine how well you pay your bills. When you have a lower FICO score the lender will need to increase the interest rate of your loan to protect themselves. The bigger a risk you are to the lender the higher your interest rate will be and this is simply the way that the lender protects themselves when they extend credit to anyone. When you understand this you will find that making sense of home loans and their interest rates is much more doable.