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.

How Mortgage Points Play a Bigger Part in Loans

How Mortgage Points Play a Bigger Part in Loans-150x150Mortgage points are various costs or fees that are paid when taking out a mortgage loan. Their value is based on the size of the mortgage loan and they have an influence on what your interest rate will be. Mortgage points are essentially a form of interest that is paid before you start making payments on your mortgage loan. Acquiring a mortgage loan can be an expensive and complicated process, but an explanation of mortgage points may make things a little easier and save you money in the long run.

What are Mortgage Points?

There are two types of mortgage points: discount points and origination points. One point equals 1 percent of the total loan amount. For example, on a $200,000 loan, one point is $2000, which is 1 percent of the total amount borrowed.

Origination points are paid to lenders in order to compensate them for their role in processing and approving your mortgage loan. Your credit history plays an important part in the number of points that you will have to pay to your lender. You can negotiate how many origination points you will be required to pay, but origination points are not tax deductible.

The points that will have a bigger impact on how much you will spend on your mortgage loan are discount points. Equal to 1 percent of your mortgage loan amount, one discount point will reduce your interest rate by 0.25 percent. Usually, lenders allow you to purchase anywhere from 0 to 3 discount points. So discount points are a form of pre-paid interest, which can help you pay less on your loan over its lifetime.

Are Mortgage Points Worth Paying for?

When you consider purchasing discount points, you must take two factors into account. The first is how long you are planning on living in your new home. Because discount points reduce your loan’s interest rate, the more you live in your home and keep making payments, the more you will save. If you plan on moving after only a few years, then paying for fewer points or even none is generally a better choice.

The second factor that you should take into consideration when deciding whether to pay for discount points has to do with your ability to pay for them. Between the large down payment and closing costs, buying a home is a pretty large investment, and sometimes there simply isn’t enough money left to purchase mortgage points. Because points are based on a percentage of the total loan amount, buying a cheaper home means that points will be more affordable as well. But with more expensive homes, such as a $400,000 home, three discount points will cost you $12,000, which is not exactly cheap, especially when you have to pay several other fees and the down payment on the closing day.

Whether it’s worth paying for mortgage points or not depends on your future plans and budget. If you do your homework and calculate how much your mortgage will cost you with and without points, you will generally find that paying for points is a good investment that will save you a considerable amount of money.

You won’t see any huge savings on interest month to month after purchasing points, but, after a 30 year loan period, those savings will add up to tens of thousands of dollars. Of course, before choosing to pay for mortgage points, you should carefully analyze your finances while taking into account the two deciding factors.