4 Factors That Determine Interest Rate on Your Mortgage
We are consistently asked this question from our clients “What determines my interest rate?”. This articles sheds some light to that answer. Short & sweet
4 Factors That Impact The Interest Rate On Your Mortgage
One of the biggest concerns that soon-to-be-homeowners have when it comes to applying for a loan is the interest rate that they'll be given. In all honesty, most of that depends on current market conditions. However, there are a few things that you can do to help yourself secure the best rate possible.
With that in mind, I've laid out four factors that impact mortgage interest rates below. Read them over so that you know how to put yourself in the best position to be given a low rate when you start to shop around.
Your credit scores
The biggest factor that determines what you receive on your mortgage is your credit score. Put simply, lenders use this number as an indicator of how likely you are to be successful at paying back your loan. They reason that if you have trouble paying back smaller loans like credit card debt, you're more likely to struggle with paying down larger debts like a mortgage.
For that reason, it's absolutely crucial to get your credit score in the best shape possible before you apply for a loan. Start by committing to making your payment on time every month. Then, be sure to pay as much above the minimum payment as possible. Finally, do your best to limit incurring new debt while you're working on paying down existing debt.
Your Down Payment
If your credit score isn't the strongest, one thing that you can do to help lower the interest rates that you're given by lenders is to make a sizable down payment. This works in two ways: by showing the lender that you're capable of saving and by lowering the overall amount that you're borrowing from the lender.
These days, most borrowers only have to come up with between 3% to 5% of the home's purchase price in order to qualify for a loan. However, if you're looking to use the down payment to lower your rate, you should aim to save between 10% to 20% of the home's purchase price.
Your loan term
In today's mortgage industry, the vast majority of loans are either 15-year loans or 30-year loans. While most homeowners opt for the 30-year option, it is important to mention that shorter loan terms are often eligible for better interest rates.
Again, the reason for this is two-fold: On the one hand, the bank will recoup their investment faster with a shorter loan term. On the other, they're also going to be receiving a higher payment from you each month.
That said, if you choose to go this route to lower your interest rate, you need to be very sure that you're able to handle making the higher payment that comes along with the shorter loan term.
Your interest rate type
There are two different types of interest rates that soon-to-be homeowners can choose from when they apply for a mortgage. They are:
Adjustable rate: Adjustable-rate loans usually start off with a low, introductory interest rate. Then, after a set period of time, the rate adjusts itself to be inline with whatever the current interest rates are at the time. At this time, your payment also changes, accordingly.
Fixed rate: Fixed interest rates are generally higher than adjustable rates from the start. However, they stay the same over the entire length of the loan, ensuring that you'll have the same payment to make each month.
Ultimately, it is up to you whether you'd rather have a fixed interest rate or an adjustable one. If you choose an adjustable-rate option, however, you just need to be prepared for the probability that your payment will go up at the end of the introductory period.