Shopping for the best mortgage rate can be stressful and often, borrowers may feel that they have been lied to when they are not offered the rate that the lender was advertising or that they were expecting to get. However, there is a reason for this. There are ten factors that affect the mortgage rate that is offered to a borrower.
1. Your Credit Score
One of the first things the bank or lender is going to look at to determine if you qualify for a loan is your credit score. Lenders consider a credit score above 700 as ‘good credit’ and are more likely to give you a loan at the lowest available rate.
The interest rates on mortgage loans tend to increase if there is an inflation. That is why you have to be aware of the economic status of the location you are buying a home in to make sure that it is the right time for you to acquire a mortgage loan with a lower rate of interest.
3. Debt to Income Ratio
The debt to income ratio (DTI) is a calculation of the total debt held by a borrower in comparison to their total annual income. Having a higher debt to income ratio will make you a higher risk to be able to pay on a mortgage loan. Those with a lower debt to income ratio may receive better interest rates because they are more likely to be able to successfully pay off the mortgage loan.
4. The Length Of Your Loan
If you are planning on taking out a 15-year mortgage, it will be cheaper than a 30-year mortgage – simply because you are taking less time to pay the money back. The less time you take you to pay back your loan, the less interest you have to pay; and the less interest calculated into the original loan, the lower your mortgage rate will be.
5. The Amount Of Money You Are Trying To Borrow
Each year, general guidelines are established for the conforming limits. That’s a fancy way of saying that there’s a range of typical mortgage amounts for that year. If the amount you want to borrow fits into that window, you’re likely to get a better rate than if it’s higher or lower than the estimated range.
6. Loan to Value
The loan to value (LTV) of a mortgage is the measurement of the loan against the value of the property that is either being purchased or refinanced. It is the final appraisal that determines the loan to value for the lender. If the loan outweighs the appraised value of the home, the mortgage rate is likely to be higher.
7. Involvement of the Government
It is just undeniable that the participation of the government has a significant impact on the mortgage rates predictions. This simply means that the more involved the government is, the higher is the chance of having a lower rate of interest in mortgage loans. So, if you are planning to utilize a government loan program to finance your home, expect a higher rate.
8. Your down payment
Just like when you buy a car, the money you put down up front, the less interest you’ll have to pay on the remaining amount. If you are fully financing your home purchase, your mortgage rate will be higher than someone who put 5, 10, or 20% down. The more you can put down, the more likely it is that you get a better rate.
9. Whether You Go With A Fixed Rate Or An Adjustable Rate Mortgage
The good thing about fixed-rate mortgages is that the rate never changes. Adjustable rate mortgage will likely be lower than the national average at first, during your introductory period but can increase as time goes on an the housing industry changes.
10. The Fine Print
Some lenders will advertise “freebies” to get more customers in the door. They may do things like pay for your property appraisal or cover all of your closing costs. To make up for that loss, the lender will wrap the costs of the “freebies” into other aspects of the loan, like your mortgage rate.
Indeed, mortgage rates are something to consider; as with any financial decision, it is essential to do your research and understand what you are getting into.