How mortgage rates are determined
All roads lead to Rome
Have you heard about the saying: “All roads lead to Rome”?
Well, Let´s imagine for a moment that “Rome” is the lowest interest rate and “all roads” are the ways to get there. In this article we will take you through those roads. Let's start at the beginning. A mortgage is a loan on a house and a mortgage rate is the interest rate on that loan. We all want to get the lowest interest rate possible, right? So, we all want to go to “Rome”.
These are the roads or the factors that affect your interest rates:
1. Credit score: this is a three digit number calculated from your credit report provided by credit bureaus. The most used model to calculate this number is FICO Score. The FICO score has a range from 300 to 850. 300 is the worst score: not even your best friend will lend you money! 850 is the best score and even strangers on the street will be happy to lend you money! A good credit will be about 720 or higher.
2. Down payment: the higher your down payment, the less interest rate because you are less risky for lenders. The ideal is to have at least 20% of down payment in order to get a lower interest rate.
3. Interest rate type: there are two basic types of interest rates: fixed and adjustable. Fixed rates do not change over time, while adjustable rates begin with a fixed period, but then they go up or down depending on the market. Usually you get a lower initial interest rate with an adjustable rate, but this rate might increase over time.
4. Loan term: the term of your loan is the time you will have to repay the debt. In general, shorter term loans have lower interest rates. The most common loan terms are: 15-year fixed rate and 30-year fixed rate.
5. Home price and loan amount: the home price minus the down payment is the amount you are borrowing. Usually you will pay a lower interest rate if your down payment is about 20% of the home´s value.
6. Loan type: there are several loan types. The most common is the conventional. There are others offered by the Government such as FHA, VA Loans, Navy Federal, and USDA. The interest rate will depend on the loan you apply for and the down payment you have. Finally, to reach “Rome” or to get the lowest interest rate, you will need the well-trained eye of an expert.
Contact or call us at 1-866-200-5250 to get that expert eye.