Mortgage lenders know how interest rates get determined, and we think you should too. If you’re like any interested home buyer, you want the lowest mortgage loan interest rates that you can get in the market. But how exactly is your interest rate determined? Figuring this out on your own can be challenging even for the savvy mortgage loan shoppers.
Understanding the various factors that determine mortgage interest rates can help you better prepare for the home buying and negotiation process and make it easier to understand your loan choices. Here’s what you should know:
Your Credit Score
Potential homebuyers with higher credit scores get lower interest rates than those with lower credit scores. Your credit score is used as the basis for determining if you’re in a position to be reliably paying your loan. Before you start shopping for a mortgage loan, it’s advisable to have a look at your latest credit report and check for any errors which you can dispute early enough.
According to OnQ Financial, using tools like the 15-Year vs 30-Year Mortgage Calculator will help you get an idea of the rates available to you based on your credit score range. To get the lowest rates possible, you need to learn different ways you can raise your credit score like paying your bills on time, paying off your debt and being cautious with applying for new credit.
Most lenders will offer slightly different rates depending on the location of your home. To get an accurate figure, you’ll need to input your state, your county, loan amount and loan type into interest rate tools available online. If you’re looking to buy a home in a rural area, such tools can help you get an idea of what rates you’ll pay. Make sure to shop with different lenders and discuss your needs as it will make it easier to understand the options available to you.
The Price of the Home and the Loan Amount
While keeping in mind that the total mortgage loan amount you’ll need to borrow is the home price plus the closing costs minus the downpayment, it’s important to understand that the price of your home and the total loan amount may determine the interest rates charged. Different home prices in an area may affect interest rates. In fact, homebuyers can expect to pay higher interest rates on mortgage loans that are particularly large or small.
A larger down payment typically means lower interest rates because mortgage lenders see a lower level of financial risk when you have more stake in your home. So, if you can save for a downpayment and put at least 20% or more down, you’ll definitely enjoy more affordable rates. Paying a down payment lower than 20% comes with an additional cost of purchasing Private Mortgage Insurance (PMI) which protects the lender in case you stop paying the loan.
Getting a lower interest rate for your loan can save you a significant amount of money over time. You must also factor in all the costs of the loan when shopping around to avoid any unexpected surprises. Make sure to use online mortgage and interest rate calculators to see how different down payments can affect your interest rate and the amount you’ll pay over the life of the loan.
The term or the duration of the loan may also determine the interest rates charged. Shorter loan terms usually have lower interest rates and lower overall costs, but come with higher monthly payments. There are lot’s of specifics to keep in mind, the main one being affordability. A Huffington Post article notes why debt-to-income ratio matters when buying a home.
Loan Type and Interest Rate Type
With different types of mortgage loans in the market, including USDA, VA, FHA and conventional loans, rates can be significantly different. Talk to multiple lenders to understand the options you have. You should also understand that interest rates come in two basic types: fixed and variable. Fixed interest rates don’t change over time while adjustable rates may come with an initial fixed period, after which they go up and down based on the market.
A combination of these different factors is what determines the overall interest rates charged by lenders. By understanding these factors, you can now choose the right mortgage loan with the most affordable interest rates for you and your home buying plans.