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Factors That Influence Your Mortgage Rate

Factors That Influence Your Mortgage Rate

When it comes to getting a mortgage, everyone wants the best interest rate. Saving a quarter of a percentage can save you thousands of dollars over the life of your loan so it’s important to prepare, shop around and compare offers so you can make sure you’re getting the best deal.  But do you know what it actually costs to get the best rate? Let’s dive in and have a look at what factors affect what interest rate you qualify for.

Credit Score

Typically, the higher your credit score, the lower your interest rate. Your credit score is an important factor for the lender to determine your willingness and ability to repay the loan. A lender will pull your credit report and review your credit and payment history, which will then in turn help determine your interest rate.
Before shopping for a mortgage, it’s very important to make sure you check your credit and work on getting it as high as possible. You also want to make sure to avoid late payments and disputes that can lead to lowering your credit score.

Home price and Loan amount

Another important factor to consider when it comes to interest rates is the price of the home and the amount of the loan you’re taking out. Lenders will evaluate your loan to value ratio (the  appraised value of the home you’re purchasing compared to the loan amount you’re borrowing). The less money you put down, the higher your LTV (Loan to Value), which in turn is a higher risk for the lender. This is because they have to loan out more money to you and when you have less money in the home, you have less incentive to keep paying it. By putting more down payment, you pose less of a risk to the lender and will typically receive a lower interest rate compared to a borrower putting less down.

Loan Term

Your loan term is the length or duration that you have to fully repay your mortgage loan. The shorter your loan term, the lower the costs and interest rate, but higher monthly payments. A typical loan term is 30 years but if you opt in for a 15 year, you’ll be paying off your loan twice as fast but you can save tens of thousands on interest alone.

Interest rate type

When shopping for interest rates, you have the option of a “Fixed-Rate” and “Adjustable-rate”. They’re exactly what they sound like. A fixed-rate stays fixed at the same rate throughout the entire life of the loan and will not fluctuate no matter how the market shifts. This is a great option for those looking to minimize risk as much as possible. An adjustable-rate mortgage will have a fixed period then adjust up or down each year according to the market. Adjustable rates are a great option for those looking for lower interest rates especially if they don’t plan on living in the property for too long. If you don’t plan on staying in your property for more than 6-10 years, you may not be able to really use the benefits of a fixed-rate mortgage and may benefit from getting an initially lower adjustable rate.

Loan Type

When it comes to getting a mortgage, there are several loan types. For a home buyer, you’re typically looking at FHA, Conventional, and VA. Rates will vary depending on what loan type you’re taking so it’s important to talk to your lender to understand the difference.