When you’re buying a new home, getting the lowest interest rate on a mortgage loan can be a big concern. If you’re smart, you’re shopping around and comparing several mortgage loans. As you shop different lenders, you may wonder what that term “rate as low as” means and what factors determine the rate you get. Knowing the factors that determine your mortgage loan interest rate in advance may help you to prepare to get a better rate proactively. While current market conditions always come into play, here are some other factors that can influence your mortgage loan interest rate.
1 Your credit score
This is an obvious factor and one that can impact any loan or credit you apply for. Lenders use your credit score and your credit history to determine if you are a good risk for making all of your loan payments on time. A borrower with a high score is viewed as a low risk, while a borrower with a low score can be perceived as a bigger risk. 720-850 is considered an excellent credit score, while 690-715 is considered good and 630-689 is viewed as fair. Anything under that 630 mark may be considered a bad risk by a lender. Also, the less credit history you have, the harder it will be for a lender to determine your risk. If your credit score is 750 or higher, and all of your other factors are positive, you may be eligible for the “lowest available rate” at a particular mortgage lender.
2 Debt to income ratio
Your debt to income ratio, or how your monthly debt payments compared to your monthly income, can be another interest rate-determining factor. Lenders rationalize that borrowers with a lower debt to income ratio are less likely to default on mortgage loan payments.
3 Loan-To-Value (LTV)
How much you borrow as compared to the cost of the home will also be a determining factor in your mortgage loan interest rate. A larger down payment can help to prove your creditworthiness to a lender and help you to secure a lower interest rate. It will also immediately give you more equity in your home. The higher the down payment the lower the level of perceived risk for the lender. 20% or more of a down payment is a plus when wanting to secure a lower rate. Lower down payments may result in a lender requiring mortgage insurance to lower their risk. The stronger the down payment, the lower the overall cost to the borrower.
4 Location and type of home
Mortgage loan interest rates may actually vary slightly from state to state and between rural and urban areas. If interest rates are higher where you live, do your homework and research different mortgage lenders. Not only where you live, but the type of home may affect the mortgage loan interest rate. For example, a single-family home that will be your primary residence may secure a lower interest rate than a beach vacation home or a multi-unit rental.
5 Mortgage loan term
The term is how long you have to pay off the loan. Mortgage loan terms are typically 15-year or 30-year terms but can be other terms as well. In general, shorter terms typically have lower interest rates and lower total costs. The downside of a short term may be higher monthly payments.
6 Type of mortgage loan interest rate
Mortgage loan interest rates can be fixed or adjustable. Fixed rates are consistent over the term of the loan, while adjustable rates fluctuate over time. An adjustable-rate mortgage (ARM) typically charges a lower interest rate than a fixed rate to start, but that may change over the life of the loan. With a fixed-rate mortgage loan, you will have the same payment each month for the life of the loan.
7 Mortgage loan type
There are different categories of mortgage loans. They include a conventional mortgage loan, as well as FHA, USDA, and VA loans. Different lenders may offer different loan types and the rates can vary significantly depending on the type of mortgage loan. There are also different eligibility requirements with each.
8 Co-borrowers
This can be a wild card for those who may be worried because they don’t have the best credit score. If you have a co-signer with an excellent credit score, it may help you to secure a lower interest rate. The credit of all co-borrowers will be considered by lenders.
For many borrowers, a mortgage loan is the largest loan they will ever have. Considering the most common mortgage term is 30 years, saving even a small percentage on your interest rate can equal significant savings over the life of your loan. For this reason, taking the time to understand interest rate influencers and research mortgage lenders, can really pay off with overall savings. To learn more about mortgage loans or view rates visit Benchmark Federal Credit Union online.