10 Things That May Affect Your Interest Rate
10 Things that May Affect Your Interest Rate –
We, as a lender, know how your interest rate gets determined, and we think you should know too. Learn more about the factors that may affect your rate below:
- Loan to Value | Combined Loan to Value
- The loan to value (LTV)is defined as the amount of money you’re borrowing against the value of your property expressed as a percentage of the transaction as a whole. So, the bigger loan amount relative to the value of the property, the higher the risk. The smaller loan amount relative to the value of the property, the less risk.
- Loan Amount
- Loan size matters because processing a mortgage involves costs and those don’t go down just because the loan amount is low.
- Loan Term
- A longer term means you will pay less each month, but a longer term also means you will pay more in interest charges over the life of the loan.
- Purpose of Transaction
- Borrowers will need to indicate who will own the property and how title will be held. This impacts rate because one borrower may have a higher rate than if there were two.
- Property Type
- Different property types such as single-family homes, duplexes, condos, etc. all have different levels of risk associated with them which means rates will vary with each property type.
- Lenders charge higher rates for those buying homes to use as a rental/investment property. There is a higher risk associated with investment properties compared to a primary residence.
- Credit Score
- A higher credit score will help a borrower qualify for a lower interest rate, while a lower credit score will result in a higher rate, and sometimes even prevent the consumer from purchasing a home. Lenders will use the middle FICO credit score between all three credit bureaus to determine this factor.
- Lock Period
- A rate lock guarantees that the lender will hold a specific interest rate at a certain cost for a set time period. This protects the borrower from market changes.
- Escrow Waiver
- An escrow waiver fee is known as a loan level pricing adjustment (LLP). It is charged because of the added risk of you paying your own taxes and insurance. The lender may increase the borrowers rate to cover this cost.
- Debt to Income Ratio
- Your debt-to-income (DTI) ratio is the percentage of your monthly gross income that goes toward paying debts. The lower your DTI ratio, the more likely you are to qualify for a mortgage. Lenders include your monthly debt expenses such as student loans or car payments and future mortgage payments when they consider your DTI, which can result in a higher or lower interest rate depending on your DTI.
While interest rates are an important factor in the home loan process, it should not be the primary factor that determines whether to purchase a home or not. So instead of only asking what the interest rate will be for the loan, borrowers should also ask more in-depth questions such as:
- What loan programs are available to me?
- How long does it take for you to close on a loan?
- How long have you been in business?
- What is your loan process like?
- How many 5-star reviews do you have?
- What happens to my loan once we are finished?
Buying a home is an important process, and everyone deserves a good interest rate. Borrowers should want to seek out the best service and strategies that will have a benefit for their home loan needs.