Researching mortgage options and then discussing them with lenders can leave any potential buyer feeling a bit confused by all of the terminology and concepts involved. Whether you’re a buyer needing to obtain a better understanding of interest rates or a seller wondering how they matter to you at all, we’re here to provide help in the form of our guide to interest rates for home buyers and sellers in Santa Cruz.
Fixed vs. Adjustable Interest Rates
As buyers start to take a look at the different types of mortgages available to them – including specialized programs, loan terms, and rate types – it’s easy to become overwhelmed and lost. The first thing to understand about interest rates is that they come in two very different forms: fixed rate and adjustable rate.
A fixed interest rate means that it cannot change after it is locked in with your lender. This helps a buyer easily determine their monthly mortgage payment and not have to worry about any nasty surprises down the road.
Adjustable interest rates, on the other hand, tend to start off lower for a period of time that is specified by your mortgage. After that initial lower rate period expires, the adjustable rates kick in and will increase according to the terms of your individual mortgage and market rates.
Adjustable rate mortgages can be a great boon for buyers able to make large payments on their mortgage in a short amount of time. Buyers looking for a more stable and long-term mortgage will usually benefit much more from a fixed-rate mortgage.
Loan type
CONVENTIONAL, FHA, OR SPECIAL PROGRAMS
Mortgage loans are organized into categories based on the size of the loan and whether they are part of a government program.
This choice affects:
- How much you will need for a down payment
- The total cost of your loan, including interest and mortgage insurance
- How much you can borrow, and the house price range you can consider
Choosing the right loan type
Each loan type is designed for different situations. Sometimes, only one loan type will fit your situation. If multiple options fit your situation, try out scenarios and ask lenders to provide several quotes so you can see which type offers the best deal overall.
Conventional
- Majority of loans
- Typically cost less than FHA loans but can be harder to get
FHA
- Low down payment
- Available to those with lower credit scores
Special programs
- VA: For veterans, servicemembers, or surviving spouses
- USDA: For low- to middle-income borrowers in rural areas
- Local: For low- to middle-income borrowers, first-time homebuyers, or public service employees
Credit Score
There are a few things that will help a mortgage lender figure out your mortgage’s specific interest rate and the most basic of these is your credit score.
Your credit score is a number assigned to you based on your credit history. Your credit history consists of every loan, credit card payment, and other debt you have outstanding or have paid off in the past. Mortgage lenders use your credit history to look into your past and current financial situation and decide if you’re a reliable person to award with a home loan.
There are some loan programs out there designed to help out buyers with less-than-stellar credit scores, and you should explore all of your possible mortgage routes before settling on a conventional mortgage.
Your credit score is a very important consideration when you’re buying a house, because it shows your history of how you’ve handled debt. And having a good credit score to buy a house makes the entire process easier and more affordable – the higher your credit score, the lower mortgage interest rate you’ll qualify for.
The Debt-to-Income Ratio (DTI)
Besides your credit score, lenders will use a more advanced method to aid in demonstrating your worthiness to receive a home loan and determining interest rates. This proof comes in the form of your DTI, or debt-to-income ratio.
Your DTI is calculated by taking the total of all your outstanding debts and dividing that number by your gross monthly income. This resulting figure is then converted into a percentage and this is your DTI. The lower the percentage, the better off you will be when applying for a mortgage since it means you have more income free to possibly pay down your mortgage faster.
Effects on Sellers
If you’re a seller and have read through all of this, you may be wondering how this matters to you at all.
A buyer’s ability to receive a mortgage is extremely important for the vast majority of real estate transactions since, without a mortgage, the buyer won’t have the funds available to purchase your property. This means selecting your buyer can matter in regards to their ability to secure financing through a lender, and you should take that into consideration when deciding which offer to accept.
Your Guide to Interest Rates for Buyers and Sellers
If you’re a buyer or a seller in Santa Cruz and are looking for more information on how interest rates will impact you, contact us today at 831-588-2334!
If you would like additional information or a market evaluation for a specific property or if you’d like to get started searching for your dream home in Santa Cruz, please feel free to reach out for a complimentary, confidential consultation.
I’m Shemeika Fox, your Santa Cruz Real Estate expert and your personalized real estate concierge, and as always, I’m here to help.
