Factors that Affect Interest Rates
When you start shopping for a lender, most companies will claim they offer “the lowest rates”, but is this true? Interest rates fluctuate frequently, and there are a number of factors that create this change. As a consumer, it’s important to do your research and know what this number should look like. Even a small percentage difference could end up costing you thousands of dollars over the life of your loan. Truthfully, there are some outside market factors that are completely out of your control. However, there are ways you can improve your interest rate on your own.
A credit score reflects how reliable a buyer will be when paying off their loan. Typically, consumers with higher credit scores receive lower home loan interest rates than those with lower credit scores. Why is this the case? Well, lenders use your credit score to predict how reliable you will be on future loan payments. Before you begin the loan application process, it’s in your best interest to check your score and review the report for any disputable errors.
Credit scores are calculated using these factors:
- Payment history
- How the credit is utilized
- Credit history length
- New credit accounts
- Credit account mix
Property Type and Location of Home
Property type, occupancy, and location, all factor in the mortgage interest rate. Pricing can vary slightly depending on the state, county, or rural area where the borrower lives.
The term, or duration, of your loan, is the amount of time you have to repay the loan. Shorter-term loans usually have lower interest rates and lower overall costs, but higher monthly payments. For example, a 15-year fixed-rate loan would have a lower interest rate, but a higher monthly payment than a 30-year fixed-rate loan.
Interest Rate Type (fixed or adjustable)
Interest rates come in two basic types: fixed and adjustable. Fixed interest rates don’t change over time. Adjustable rates may have an initial fixed period, after which they go up or down each period based on the market. Your initial interest rate may be lower with an adjustable-rate loan than with a fixed rate loan, but the adjustable rate might increase significantly over time.
Home Price and Loan Amount
Depending on the size of the loan, homebuyers may pay higher interest rates on loans that are particularly small or large. Depending on your circumstances or mortgage loan type, your closing costs and mortgage insurance may be included in the amount of your loan, as well.
On average, a larger down payment will result in lower home loan interest rates. If you can comfortably put down 20% or more of the home’s purchase price, you should. In most cases, you will get a better interest rate. However, a smaller down payment may make the most sense for your current financial situation. Some loans offer as little as a 3.5% down payment, but borrowers will usually be required to purchase Mortgage Insurance. Interested in what your monthly payments might be? Check out our Mortgage Calculator.
It’s best to take all long-term costs into consideration when looking for a lender.
Type of Loan Program
Rates can also be significantly different depending on the type of loan: Conventional, FHA, VA, USDA*, etc. Generally speaking, if the loan program is government backed (FHA, VA, USDA) a lesser down payment is required from the borrower and may be offered at a more attractive interest rate.
Not all of these factors are within your control. But understanding how your mortgage interest rate is determined will help you be more informed as you shop for a mortgage.
To learn more about your potential interest rate, contact a Mortgage Advisor or fill out the form below.