When buying a home, you and your lender are working to secure the lowest mortgage rate for your loan. Even saving a fraction of a percent on your mortgage rate can save you thousands of dollars over the life of the loan. So it definitely pays off to be prepared with the knowledge of what goes into your mortgage rate when you apply for a loan. Here are 4 factors that determine your mortgage rate.
Factors That Determine Your Mortgage Rate
Your credit score is one of the largest factors that determine your mortgage rate. In general, buyers with a higher credit score qualify for lower interest rates than buyers with lower credit scores. Lenders use your credit score to predict how reliable you’ll be in paying your loan. To get a ballpark estimate of your credit score, you can check online services that tell you the areas you are excelling and the areas of your credit that you can improve. For an exact credit score, talk with your lender. Once you see you scores, you can dispute any errors which can help lead to a higher credit score and a lower mortgage rate.
In general, buyers who make a larger down payment on a home loan, qualify for a lower interest rate because lenders see a lower level of risk when you own more of the property. So while it’s not necessity to put 20% down on your home loan, if you can do it you should as it will help lower your interest rate. If you cannot make the full 20 percent down payment, lenders will often require you to purchase private mortgage insurance which protects the lender in the event that you stop paying your loan. This will add to the total monthly payment.
If you opt to do a 15 year loan over a 30 year loan, you’ll generally be offered a lower mortgage rate and lower overall costs, but a higher monthly payment. This is because lenders see shorter terms as lower risk, but your monthly payment will increase to account for the full amount of the loan.
There are many different loan types– conventional, FHA, USDA, and VA are just to name the most common. Rates can be significantly different depending on what loan type you choose to use. For example, rates of a VA loan tend to be lower than an FHA loan. Talking with your lender can help you better understand all of the options for you and what options can help you get the lowest interest rate.
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