What's a 'Good' Interest Rate on a First Home Mortgage?

Shopping for your first home is an exciting experience. After all, it's the first place you can call your own! While finding a house that you're happy with is important, so is finding a good interest rate on that home mortgage. But if this is your first home purchase, you may not be familiar with interest rates. How do you know what's considered a "good" interest rate for your first home mortgage?

We'd like to help you better understand mortgage interest rates, so you can feel confident in your decision. These questions will help you determine if you're receiving a reasonable interest rate.

Does the Interest Rate Match My Qualifications?

First, market trends can affect interest rates for mortgage borrowers . Unfortunately, borrowers can’t control interest rates, so it's always a good idea to brush up on your knowledge of current rates. This can help you negotiate a better interest rate with a lender, too.

There are some individual factors to track, however. Your monthly income, monthly debt payments (such as student loans), monthly expenses (such as utilities), credit score, and down payment can all affect the rates you’ll see from various lenders. 

For example, if your credit score is less than 620, or if you have a small down payment, you may not get the lowest interest rate. Higher credit scores and larger down payments will help you get a lower interest rate. (Here's a more in-depth explanation of those factors.)

Can I Afford the Monthly Mortgage Payment?

Here’s something many lenders don’t mention during the mortgage process: you don’t need to accept the full amount of the loan. They may be willing to give you a higher loan, but you must decide your comfort level with the loan amount. It might be somewhere below the amount set by a lender.

Even so, many first-time homebuyers need guidance. It's often recommended that borrowers should spend no more than 28%-30% of their gross monthly income on a mortgage payment.

Can I Afford the Closing Costs?

Closing costs vary but are often between 3% and 5% of the house’s purchase price. A lender will give you an estimate of your closing costs on your first home mortgage, but it would be smart to budget 1% more just in case the estimate is lower than the actual costs.

More importantly, you will have more room to negotiate closing costs if you’re a “strong borrower” (someone who uses credit wisely and handles loans responsibly) and a “good risk” (someone who will likely repay their loan on time) in the eyes of the lender.

Does a Fixed- or Adjustable-Rate Mortgage Make More Sense for Me?

The type of loan can also determine if you’ve received a “good deal” on your first home mortgage. You face two basic choices: a fixed- vs adjustable-rate mortgage. Both have advantages, depending on how long you plan to stay in your first home.

If you plan to stay in your home for at least five years, a fixed-rate loan makes sense. Fixed-rate loans keep the same rate for the entire term of the mortgage. But if you're planning to be in your first home for only a few years, an adjustable-rate mortgage (ARM) might be a better choice. The lower rates offered in the first few years of an ARM mortgage would benefit a shorter-term plan. ARM mortgages were, created specifically for this reason.

How Do I Know If I'm Working with the Most Affordable Lender?

The truth is, you won't know if you are getting a good interest rate on your first home mortgage unless you compare rates from different lenders. Once you've compared, you can choose the lender with the best rate. That lender will answer your questions and get you the best loan terms.

We highly recommend exploring your options, because you may even qualify for an affordable first mortgage with mortgage assistance. Twin Cities Habitat’s True Path lender, TCHFH Lending Inc., provides affordable mortgages to low- and moderate-income households across the Twin Cities’ seven-county metro. The TruePath Mortgage supports income-qualified borrowers. Click here to learn more about the criteria of this unique loan opportunity.

More Resources for First-Time Homebuyers

From interest rates and mortgages to making an offer, buying your first home might feel overwhelming. We understand! That’s why we created a First-Time Homebuyer Guide. This guide includes videos and resources about readiness, mortgages, searching for homes, closing, and more. And if you decide to partner with Twin Cities Habitat, we’ll be there every step of the way.