Factors That Affect Your Mortgage Rate
Everybody wants a low rate on their mortgage, but not many understand all the things that go into determining your rate. For many homebuyers, these factors can be confusing and difficult to determine. Knowing what affects your rate can help you secure a better deal, which is why we’ve created this list of the top influences to help you out:
- Credit score
When offering you a loan, one of the first things any lender does is assess your individual risk. The primary method of doing this is through your credit score, the three-digit number you are assigned based on past payments and your track records with credit cards and other loans.
A higher score is best and will likely mean you get a better rate. Having a low score puts you at a disadvantage and means you’ll have a harder time securing a good rate.
- Down payment
The higher your down payment, the better your interest rate will be. As with your credit score, this is taken into account to determine your risk to a lender. Remember, by giving you a loan, the bank is gambling on the fact that you’ll pay it back. By putting up more money up front, you prove greater commitment, and establish more reliability with the lender, meaning they’ll be more inclined to give you a better rate. You also decrease your loan-to-value ratio, which makes the loan less risky for the bank.
- Home location
The market you’re purchasing in can certainly affect the rate you're given. In areas with healthier, more predictable markets, you’ll likely get a lower rate. In areas with high demand, you might be charged a higher interest rate. Lenders will also look at past trends for the region. What percentage of loans are repaid? Do borrowers often refinance? Areas where these numbers are high force lenders to increase rates to compensate for the risk.
- Property type
Even if your credit score is good and your down payment is high, your interest rate may vary based on the property type. Different property types are associated with varying levels of risk. Generally, the rate you receive on a single-family home will be lower than the one you’re offered on a vacation or multi-family home. These determinations are made based on market trends and the historical likelihood of a default on the loan.
- Economic factors
There is an aspect of your rate that changes based on external, economic factors. Just like investments and consumer goods are affected by the economy, they also affect mortgage loans.
Generally speaking, fears of inflation cause interest rates to rise, as does a strong economy. Monetary policy also plays a role. While the Federal Reserve doesn’t set interest rates, they are in control of the money supply, and their actions can have a big impact on what interest rates are available to consumers. Ultimately, any economic factor is going to be out of your control, but the key is understanding them enough to know when the best time is to buy.
- Loan type
Different loan types come with differing requirements for eligibility, and different interest rates. From FHA loans, to adjustable rate mortgage or conventional fixed-rate loans, you’ll want to do your research to see which loan type best fits your circumstances.
If you’re looking to reduce the amount of interest paid over time, opting for a shorter loan term is a good choice. Not only will it have a positive effect on your rate, but it will also significantly reduce the total amount of interest you pay.
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