Buying a home is the most financially complex transaction most people will experience in their lifetimes. Few Americans pay for a house in cash, and instead take out a bank loan, or mortgage, to cover the cost of the house. As with any type of loan, the interest rate (or cost of borrowing money) varies based on a number of factors--overall economic conditions, base lending rates set by the Federal Reserve and nationwide housing sales, among others. The Federal Reserve reports that more than 14 million mortgages were active in 2009. Estimating a mortgage rate also relies on a number of factors, both market-driven and related to a borrower's financial history.
Step 1
Obtain your credit score. The credit score is the primary influence on the rate you will receive. Research performed by Informa Research Services on behalf of the Fair Isaac Credit Organization--the company that sets the FICO credit score--shows that the difference between a person with a credit score of 760 to 850 and one between 680 to 699 could be as much as four-tenths of one percent. That equates to as much as $24 extra per month for every $100,000 borrowed.
To find a credit score, go to any of the three major credit bureaus--Experian, Equifax or TransUnion--or FICO's website (see Resources).
Step 2
Determine the length of the mortgage. Conventional fixed-rate mortgages come in three sizes--10-, 15- and 30-year--and the rates fluctuate with the term. For instance, in February 2010, Bankrate.com's national 30-year fixed-rate mortgage average was 5.05 percent; for a 15-year loan, it was 4.49 percent.
Step 3
Choose between a fixed or adjustable rate. There are advantages to either type. Both loans are typically sold in 30-year terms. Fixed-rate loans maintain an interest rate for the entire length of the loan. Adjustable-rate mortgages set a fixed rate for a term of three, five, seven or 10 years, and use an adjustable rate for the remaining years. While fixed rates provide protection against skyrocketing interest rates, adjustable-rate mortgages will save homeowners money during times when lending rates are cut.
Step 4
Determine your rate by taking all of this information and plugging it into a mortgage calculator (see Resources). Enter information such as the purchase price of the house, how much of a down payment is available and the term, among other items. The Web-based calendar will then calculate the mortgage's annual percentage rate almost instantly.
Tips and Warnings
- An interest rate can be lowered by purchasing "points," or a percentage discount. The costs of points vary by lender.
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