Although the process took a bit longer than some had hoped, banks have finally eased the credit restrictions triggered by the Great Recession. So, home ownership is a possibility for many more people today than it was a few years ago. At the same time, inventory is relatively strong, so there are many choices in terms of housing.
There are also many choices in terms of mortgage loan types. Before you begin shopping in earnest, it’s important to know what it takes to get the best deal possible. Sites like LoanReviewHQ.com are a good resource in this area. As a primer, here are seven common factors which go into a mortgage interest rate calculation.
In many ways, there is an inverse relationship between interest rates and credit scores. The higher the score, the lower the rate. There is no hard-and-fast rule, but generally, your credit score is made up of:
- Payment history (35%),
- Credit utilization (30%),
- Credit history length (15%),
- New accounts (10%), and
- Credit account mixture (10%).
Typically, the people with the highest scores pay their bills on time, use less than a third of the credit available to you, and have a long credit history which demonstrates mastery of different types of loans, you should be in good shape. If you are deficient in any area, you should still qualify for a loan, but expect to pay more.
Small loans, perhaps $100,000 or lower, usually have higher interest rates. The bank charges more to make the loan financially worthwhile. On the other end, jumbo loans over $400,000 involve much more risk. So, rates are higher. Rates are usually lowest in the “sweet spot” between these two types of mortgage loans.
When more of your own money is tied up in the property, there is less risk for the bank. A 20% down payment often significantly reduces your interest rate. But this is only a rule of thumb. In some cases, down payments as low as 5% can positively affect your interest rate.
Term of the Loan
This factor could go either way. Some lenders charge more for short-term loans. Banks make more money when they collect thirty years of interest payments as opposed to fifteen years. In other cases, it’s the opposite. Some banks feel that a short-term loan is less risky. Therefore, they lower their rates for shorter loans. So, be sure and shop around.
Fixed Rate v. Adjustable Rate
Generally, adjustable rates start lower and increase over the life of the loan. Fixed rates stay the same no matter what, so they usually start a little higher.
Type of Loan
Not all mortgage loans are created equally. As mentioned earlier, the length of the obligation and amount of down payment often factor into the equation. Additionally, some loans, such as FHA loans, have low down payments and higher interest rates. VA loans, on the other hand, usually require higher down payments and charge less interest. There are other variations as well.
Not many people think location is important in the mortgage loan process. But it can be a factor. If the real estate market in that area is active, the lender may believe that the risk of default is lower. The same thing applies to very inexpensive homes or very expensive homes, as mentioned above.
The more information you have when you look for mortgages, the better the outcome will be.