Your Mortgage Rate is Determined How? The Answer May Surprise You!

Your Mortgage Rate is Determined How-The Answer May Surprise You- 150x150Finding a good mortgage rate is very important when shopping for a mortgage loan. Lenders compete with each other to offer borrowers the best rates, but you must understand that the interest rates that lenders advertise are influenced by several factors, and you will probably end up paying a higher rate than the one you initially thought you would. Even a slight increase in interest rate translates in thousands over the life of the loan, so getting the smallest possible rate should be your main goal when looking for a mortgage.

The interest rate that you will have to pay is determined by taking into account what your credit score is, which part of the country you live in, how many mortgage points you are buying, the size of the down payment that you will be making, and, ultimately, the lender that you choose to go with. All these factors can significantly influence what your interest rate will be and make a large difference in what you will be paying over the years. In this article, we will have a look at each of these factors individually in order to better understand how your mortgage rate is determined.

Your Credit Score

Credit scores have a huge impact on mortgage interest rates. You might have a good credit score,and be comfortable with it, but you might be paying significantly more on your mortgage than a home buyer with a perfect credit score. Perfect credit scores are usually in the 740 and above range, while credit scores that are considered good are in the 700 to 740 range. With a credit score lower than 700, your interest rates will most likely be much higher than those of someone with a higher than 700 credit score. Even more, people with credit scores under 620 will not only receive high interest rates on their mortgage loans, but find it very difficult to actually get a mortgage loan.

Remember that you can check your credit report once per year for free, so keep an eye on your score before applying for a mortgage, and try to improve it as much as you can. If you are not in a hurry to become a home owner, and can postpone buying a home for 1 or 2 years, then you have plenty of time to make significant improvements to your credit score by paying off your debt and making sure that everything is paid on time.

The Part of the Country That You Live In

Depending on which region of the United States you live in, your mortgage rates might be higher or lower. There are no rules, but usually mortgage rates are higher in regions where the cost of living is higher. You should take this into account as well when deciding where you want to move. If you don’t have big reasons for moving in a certain region, then you could look at other similar areas in the country where the cost of living is lower, which means that your mortgage rate will be lower.

How Many Mortgage Points You are Buying

By buying points, you are basically pre-paying interest in order to lower your interest rate. One point normally costs 1 percent of the total loan amount and reduces your interest rate by one eighth of one percent. Buying a home is very expensive initially, so you should make sure that you can afford to buy points before deciding that they are worth it. Another thing that you must consider before buying points is how long you are planning to live in the home. Buying mortgage points is not recommended for those who plan on moving after only a few years.

How Much Money You Are Putting Down

The size of your down payment will help you save money in two ways. First, if your down payment is 20 percent or larger, you won’t have to pay for Private Mortgage Insurance (PMI), which can be quite expensive. Second, home buyers who make a smaller down payment will be seen as a bigger default risk by the lender and, most likely, asked to pay a larger interest rate. So coming up with a larger initial payment will help you save significantly over trying to save some money at closing by putting down a smaller amount.

Your Lender

Even if you have a good relationship with a mortgage lender and you are promised the best mortgage rates, shopping around and comparing offers from multiple lenders is never a bad thing. Lenders may be competing with each other, but they also participate in various lending programs and have other rules of structuring their mortgage loans and fees.

There are several factors that have an influence in determining your mortgage rate, and you might think that you are getting the lowest mortgage rate, but you should pay attention to other aspects of your mortgage loan before signing a contract. You might be offered a much lower interest rate by a lender, but, unless you pay attention, they might charge you significantly more on closing costs than other lenders. This can even lead to losing money over going with the lender that offered a slightly higher interest rate, but lower closing costs. Fortunately, with a little research and carefully comparing several mortgage offers, you will be able to find a mortgage loan that will suit your needs.

Credit Scores and Mortgage Approval

The Lower The Score, The Higher The Rates
credit-scoreAny potential consumer who is contemplating purchasing a home, or even refinancing their existing one, needs to understand how incredibly important their credit rating is in the loan evaluation process. The credit score is the basis for lending institutions and banks to determine a borrower’s creditworthiness, which therefore establishes the rate of interest they will be assessed for the loan, or even the eligibility to qualify. In simple terms, the lower the credit score is, the higher the mortgage interest rate. It all boils down to the level of risk. Statistically, those with low credit scores are more likely to default on their mortgage, so loan approval or eligibility becomes that much more difficult as a result of more stringent requirements.

The best strategy for any home buyer is to access their credit scores long before they begin their search for lending options, or even looking for the prospective home itself. This is for two primary reasons. The first being just how long it takes to actually acquire the credit reports from each of the credit reporting bureaus (Equifax, TransUnion and Experian), and determining whether or not any changes, corrections or improvements need to be made, and this takes a bit of patience, and time. Getting reports from all three agencies is important because mortgage lenders will typically evaluate a potential borrower’s creditworthiness by merging those scores into one basic number, or ‘mid-score’.

Naturally, the better that number is, the better chances for loan approval, and with an affordable interest rates. In general, any potential home buyer needs to have a credit rating of at least 720 to keep from having any negative pricing adjustments factored into their mortgage. This will certainly reflect on the monthly payment structure, the amount of interest applied to the loan, and even how much funding the bank or lending institution will consider for approval. The better the credit score, the more affordable the offer will be, with the best possible terms.

How to Get a Great First Mortgage

mortgageIt is part of the American dream to own your own home. Most people feel a huge accomplishment in buying a home of their own. There are several advantages to buying a new home vs. renting a home. The first being Equity. Equity is established every month with your monthly mortgage payment. Instead of just paying rent you are putting equity in your home and investing in your future. Secondly, there is a tax benefit to owning a home. When owning your own home your mortgage interest and property taxes are tax deductible. Your accountant will help you with details and advise. Last, you are building credit. Make all mortgage payments on time and this will improve your credit history.

Mortgage companies have special programs made especially for the first time home buyer. Some are private programs and some companies even have government programs. If you can put very little money down on your home an FHA loan is probably the right program for you. It allows for gifts and grants as down payment or for closing cost. The mortgage rates are good and fees are low. If you can get approved for an FHA loan they are usually the best suited for first time homeowners. The rate is low and there are many restrictions on banks and mortgage companies so they cannot charge you too much in fees.

Buying a new home can be a stressful time for most, but if you do your research and make sure you have all your documents needed to get a mortgage and it should make it a lot easier on you. Your mortgage company will pull a credit report on you. You will have to provide income documentation, assets, information on the home your buying, insurance company information etc…

When you have decided to buy a home there are a few things you need to do:

Make sure your credit is good:

  • Do not open any new credit cards or buy any large items prior to buying your home
  • Pay all credit cards and bills on time

Make sure you know what you can afford:

  • Look at your DTI. This is your debt to income ratio
  • Mortgage companies rely a lot on this ratio

Make sure you have the money:

  • Assets are also a huge part of receiving a mortgage loan
  • You need to have at least 5% to put down unless you can qualify for an FHA loan which will only require 3%
  • You will also need money for closing cost and most loans are going to require a certain amount of money in reserve (most require 3 months)

Purchasing a home is one of the most satisfying things you will do in life, so be sure to take it serious and listen to your mortgage adviser. Happy Hunting!