Most people buying a new home will need to borrow money from a lending institution to pay for the full cost of the house. These loans are referred to as mortgages, and like every other type of loan, they have a cost associated with them known as an interest rate. In mortgage lending, the interest rate is simply called the mortgage rate. The mortgage rate is a small percentage of the loan that you must pay every month to continue living in your home.

Interest rates of every kind, including the mortgage rate, measure the underlying risk that the loan may not be paid back. Lending institutions charge a higher rate when they perceive a higher risk of the loan not being paid back. Alternatively, they charge a lower interest rate when they perceive a lower risk of the loan not being paid back. There are various reasons that lending institutions perceive higher or lower risk when determining what your mortgage rate should be.

#1. Credit Score and Credit Report

One of the most basic pieces of information that almost all lenders use is your credit score and credit report. Before you go in to get a mortgage, get a copy of your credit report to make sure that it’s accurate. If there are any errors that will negatively affect your credit score, get them removed from your credit report as soon as possible. Your credit report provides the lender with detailed information on the level of risk they are taking by lending you money. Your payment history, length of credit history, number of credit accounts, derogatory marks, and other information will help them determine what mortgage rate to charge you. If you plan on buying a house in the near future, monitor your credit report closely and do everything in your power to raise your credit score. The Fair Credit Reporting Act (FCRA) requires each of the three nationwide credit reporting companies (Equifax, Experian, and TransUnion) to provide you with a copy of your credit report, at no charge, once every 12 months. You can request your free copy at annualcreditreport.com.

#2. Loan Term

The loan term is how long it will take you to pay your mortgage back. Shorter terms usually have lower mortgage rates. However, shorter loan terms also have higher monthly payments. The lending institution is taking on less risk because you will be paying your mortgage back much quicker. Longer loan terms have higher mortgage rates because it increases the chances that the loan may not be paid back. More unfortunate circumstances may occur over a longer period of time that may prevent you from paying your mortgage back.

#3. Down Payment and Home Price

A larger down payment means a lower mortgage rate because lenders perceive you as less risky when you have a higher stake in the property. The standard down payment is typically around 20% of the home value. If you can afford more than 20%, you should consider paying more. It can save you money in the long-run because less interest will accrue over time. You will also build equity in your home much faster because it will take you less time to pay off the total amount of the loan. Your home price will also be a significant factor in determining your mortgage rate. A more expensive home will come with a higher mortgage rate because it will require more money to fully pay off the loan. Get a good sense of your price range to determine what mortgage rate could be associated with the price level of your new home.

#4. Property Type

Traditional single family homes get the lowest mortgage rates because they have lower historical default rates. On the other hand, multi-family homes, condos, co-ops, and mixed-use developments have higher historical default rates, and therefore higher mortgage rates associated with them. Housing used for a vacation home or a rental also has a higher mortgage rate due to higher default rates.

#5. Location

Mortgage lenders have different pricing depending on what location you live in. If you are planning on moving to a different location, especially another state, check the lenders rates in that specific area. Also, larger lenders often times don't service rural areas. If you are moving to a more remote rural area, make sure and find a lender that will do business with you.

#6. Shopping

Sometimes your ability to get a lower rate depends on the time you spend shopping around. There are most likely multiple mortgage lenders in your area and you should take the time to get a quote from each one. These are competing institutions that will often have different prices for mortgages. Taking the time to get a quote from each one could save you thousands of dollars in the long-run.

#7. Fixed vs Adjustable Rate Mortgage (ARM)

Fixed Rate Mortgages have a mortgage rate that stays constant throughout the life of the mortgage and is based on the factors described above. Adjustable Rate Mortgages are based on the factors described above but the mortgage rate will also fluctuate after a given amount of time. Usually ARMs start out with a lower mortgage rate than a Fixed Rate Mortgage because you are potentially taking on more risk in the future. When the ARMs start to adjust, they adjust based on a specific market, often times the US Treasury market. Once the adjustment period starts, your new mortgage rate will be the market rate plus some margin, maybe 1% or 2%. ARMs can be risky for the borrower, as interest rates can rise significantly over the life of a mortgage. Fixed Rates can be risky for the bank, since it allows the consumer to lock in an amount that may become well below the market rate.

#8. Things That Are Out of Your Control

Interest rates fluctuate significantly over time, driven primarily by macroeconomic factors such as inflation and the overall strength of the economy. Current interest rates are near historic lows, but nobody can say for certain how long that will last. As with any investment, there is always an element of luck and timing.

The benefits of credit card use go far beyond convenience and emergency finance. Credit card companies make a lot of money from merchants when you use your card, and more and more card issuers are willing to give their customers a small piece of the action in one form or another for doing so. Shrewd card users can save money, protect their assets and even put extra cash in their pockets if they choose their plastic wisely. To help you get started, here’s a rundown of some commonly provided credit card extras.

Cash is king. Many cashback programs offer different amounts back for different categories. For example, they may offer 2% at gas stations and 1% at grocery stores. Some categories even go as high as 5 or 6% for some cards. Cards can also differ in how they give you the cash back. Some will give it to you as soon as you charge something to the card. Others wait until you’ve paid off your charges. Many card issuers require you to login to their site to manually redeem your cashback rewards. It’s also a common practice to only issue cash back rewards over a certain amount, such as $25 or $50, and often only in certain increments.

Airline Miles

Before just about every credit card company was giving their customers cashback for purchases, they were giving away airline miles. Originally, airline miles could only be used on airfare, but today they can be often used on a wide variety of travel related expenses such as hotels, rental cars and the ever popular first-class upgrade. If you travel frequently, you may be able to get more value out of an airline miles card than a cashback card, but keep in mind you're locking yourself into a pretty narrow range of things you can buy and specific airlines.

Travel Perks

Airlines and credit card issuers have been working together for some time now. In addition to cards offering airline miles, more and more airlines are offering perks such as priority boarding, a free drink or waived bag fees to cardholders.

Rental Car Insurance

Rental car insurance isn’t just limited to travel credit cards. In fact, it’s one of the most common perks. Usually the way it works is you pay for the car entirely with your credit card, decline the insurance that the rental car company will try really hard to convince you to buy, and you should be covered. Definitely read the fine print in your cardholder agreement before using this one though - it’s not one you want to get wrong. Carefully consider the insurance limits and what is and isn’t covered.

Balance Transfer

This one is arguably more a feature than a benefit, but we’ll include it here anyway. If you’re drowning in credit card debt on a high interest card, the credit card issuer is likely making some good money off the interest you’re stuck with. Not too surprisingly, other credit card issuers may want to get their hands on some of that interest. They may offer you a better rate and a balance transfer, so you can pay off your high interest credit card and roll your debt over to a lower interest one. Of course, you’ll still be paying quite a bit in interest. It’s not a substitute for just paying off your debt if you can. Do pay attention to both the introductory rate and the eventual rate that it’ll kick over to after the introductory period. You’d hate to be stuck in an even worse deal after 6 or 12 months.

Sign-Up Bonuses

This is yet another way credit card companies are paying customers to use their card. For people with good credit, it’s not uncommon to be offered a several hundred dollar sign up bonus. It usually comes with the contingency that you spend a certain amount on the card within some predetermined amount of time. The banks hope that the card makes its way into your wallet and daily life so that you continue use the card well after you’ve hit that limit. Usually cards with high sign-up bonuses don’t offer a ton of cash back, if any at all, and vice-versa.

Extended Warranties and Returns

Many credit cards also give you extended warranties or return policies on certain items purchased with the card. This is part of the agreement that merchants have to sign before they can accept a particular card. Sometimes it’s double the original warranty. Sometimes it’s a fixed amount of time. Usually there are limits too, so be sure to read your cardholder agreement when trying to decide which card to use for a major purchase.

If you have cash that’s lost or stolen, good luck getting any of it back. With credit cards, however, it’s a different story. Under federal law, your liability is limited to $50 if your card is stolen, provided you report the theft to the issuer within a reasonable amount of time after discovering it. If the card itself is not stolen, just the credit card number, and it’s used to make an unauthorized purchase, you cannot be held liable. For most credit card issuers, it’s more valuable to be able to advertise $0 liability than to very occasionally be able to collect $50. They generally waive the $50, remove all unauthorized charges and just replace the card for you.

It’s hard to believe there was a time when everybody carried cash for daily transactions. In today’s society, there’s really no reason to. Almost every business in the country that accepts payments directly from customers accepts some credit cards. It’s not just a matter of personal preference anymore. If you don’t use credit cards for your purchases, you’re losing out.

A home can be one of the most significant investments you make in your entire lifetime. A home is a place where you can store your personal property, have freedom to live your own lifestyle, raise a family, and accumulate wealth in the time you are enjoying those benefits.

Home Price Appreciation

Below is a chart of how the Home Price Index has changed on a quarterly basis over the past 15 years. The Home Price Index is a broad home price measurement across various geographical locations, which is produced by the Federal Housing Finance Agency.

As you can see, home prices have moved upwards (I.e. any quarter above the black line) the large majority of the time. Out of the 102 quarters in this chart, home prices declined in value in only 19 of them. This data includes the late 2000's as well, which was the worst housing crisis the US has ever seen. As an example, if you bought an average US home in 1991 for $100,000 and held it through the worst housing crisis in US history, it would be worth around $234,000 today.

Renting vs Buying

Should I rent or should I buy a home? This is a question that most people will eventually come to in their adult lives. There are many things to consider before making this difficult decision. It is not as simple as comparing monthly rent payments with monthly mortgage payments. When you own a home, you must consider property taxes, property insurance, homeowners association fees and maintenance costs. Maintenance costs can be extremely expensive and are often underestimated by homeowners. You must seriously weigh these factors before making the leap from renting to buying a home.

The main benefit of buying a home, rather than renting, is the fact that you will build equity in your home to increase the value of your investment over time. Let's go over a quick example to see how much money you could save by buying instead of renting.

Let's start by using the average cost of a US home (about $200,000) and the average cost of US rent (about $1,000 per month). Also, buying a new home requires a down payment, usually between 10% and 20%. Let's assume a 20% down payment to be safe. Let's also assume that it is a 30-year mortgage. You can see how we set up the rest of the calculation in the image below.

We used a very modest home appreciation of 2%, but you can see from the example in the previous section that home prices can appreciate much faster than 2% a year. In this very modest example, you would break even after 10 years of homeownership. After 15 years, you would have saved $16,586 ($92 per month) and you would be able to sell your home for $269,175. So, you would not only save more money than the renter, you would be able to sell your home for a nice profit, which is something a renter would never be able to do.

Things to Consider Before Investing in a Home

When considering homeownership as an investment, make sure that you intend to stay in your home for at least five years and that you will continue to make a steady income to pay your mortgage during that period. You should also make sure that the home is in a location that you will be happy with for a while. Shop around to find a home that perfectly suits your needs. If you are in a stage of your career where you may be required to move around a lot, homeownership may not be the best investment for you. Consider all the extra work and expenses that homeownership requires. Renting will get you used to people paying for and fixing things that make your living situation comfortable. Homeownership requires you to spend the money and make the effort to keep your residence in nice condition. If you are willing to make the sacrifices and put the necessary time in, you can reap the rewards of a great investment.

According to US Census Bureau statistics, home equity makes up the majority of American’s net worth. In fact, a staggering 73% of total net worth comes from home equity. Adults under 35 years old is the only age group where total net worth is not made up primarily of home equity. As people get older, and presumably their homes appreciate, home equity makes up a higher and higher portion of their overall net worth. If you have considered all the responsibilities of owning a home and you are ready to make a long-term investment, homeownership could be a great way to build wealth.