Interest rates affect how much house you can get for your money and what you can expect to pay in monthly mortgage costs. Familiarizing yourself with a few interest rate basics can help you make informed decisions when you’re searching for a new home in New Jersey.
How Interest Rates Affect Your Long-Term Costs
When you’re comparing loans and interest rates, it’s easy to become too focused on the amount you’ll pay each month instead of the amount you’ll pay over the course of your loan. Let’s say you plan to buy an $800,000 house, offer $100,000 as a down payment and finance the remaining $700,000 at 4 percent interest for 30 years. In this scenario, your monthly payment would be $3,342. (Taxes, if included in your mortgage payment, would increase the monthly total.)
If the interest rate for the same loan was 3 percent, your monthly payment would be $2,951. A difference of $391 per month may not seem like much -- that is until you consider the lifetime cost of the loan. At 4 percent interest, you’ll pay $140,760 more over 30 years than you would if you received a 3 percent interest rate. With that much money, you could pay for your child’s college education, add a pool to your backyard, or take several top-flight vacations.
Would you like to estimate your mortgage costs? Enter the loan, down payment and interest amounts in the calculator on the Quicken Loans website.
When a Higher Interest Rate May Be Worth It
Sometimes, a higher interest rate and lower monthly payment may not be a bad option. If you plan to sell your house in less than five years, the long-term costs might not concern you. Similarly, if you expect to sell a business or another property soon and use that money to pay off your mortgage years early, the higher interest rate may not be a key concern.
If you do plan to sell within five years, an adjustable-rate mortgage (ARM) may be a good choice. Your interest rate will remain fixed for five years and then adjust periodically unless you sell your house or refinance with a fixed interest loan.
A Low-Interest Rate Can Offset a Higher Home Price
A low-interest rate may give you the flexibility to increase your house-hunting budget. Although the price of a home may be higher than you’d like, a low-interest rate can help you ensure that your monthly costs remain manageable.
Why Aren't Interest Rates the Same for Everyone?
Despite applying for home loans at the same time, you and your friend may be offered different interest rates by lenders. Interest rates are influenced by:
- Your Down Payment: The more you put down, the lower your interest rate. You’ll get a better rate if you make a down payment that’s at least 20 percent of the purchase price.
- Loan Type: Lenders consider the type and length of the loan you’ve applied for when determining the interest rate. Interest rates may be lower on loans guaranteed by the U.S. government, like Veteran’s and Federal Housing Administration Loans.
- Your Credit Score: Your credit score is an important factor in determining your loan amount and interest rate. If you have poor credit, a bank or mortgage company may not be willing to make a large loan and may charge you a higher rate of interest. Your credit score is determined by payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent) and the number of new credit accounts you’ve opened recently (10 percent), according to My Fico.
- Where You Live: It may not seem fair, but interest rates also vary depending on where you live. Lenders consider the health of the local economy when setting rates.
- Debt-to-Income Ratio: Your lender will look at how much money you take home every month and compare that number to your monthly debts. The more that’s leftover after you pay your rent or current mortgage, the lower your interest rate.
With interest rates expected to remain low for the foreseeable future, now is an excellent time to buy a new construction home. If you’ve been having trouble finding the perfect location for your next move, why not consider a new construction home built by Country Classics in Central New Jersey? Contact us for more information about available lots and floor plans.