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Several key factors affect your mortgage interest rate. In this article, we’ll explain what those factors are and provide a brief overview of just how mortgage interest rates work.
When you initially start shopping for a home mortgage, you may be drawn to advertisements for ultra-low interest rates. These may be rates that seem too good to be true, and you may gladly contact the lender or mortgage company to complete your loan application. However, the unfortunate truth is that all too often, mortgage applicants are unpleasantly surprised and even disheartened to learn that they do not qualify for the advertised interest rate. But, by learning more about the factors that influence your interest rate, you may be able to structure your loan in a more advantageous way.
In its simplest terms, a mortgage interest rate is the percentage of your existing principal loan balance, which you pay your lender in exchange for the money to make your home purchase. Note, this is not the same as your annual percentage rate (APR), which takes into consideration other costs, including your mortgage interest rate.
As suggested, your mortgage rate depends on several key factors, including housing market changes and movements in the global economy, amongst other things. This is why mortgage rates are always in constant flux. However, you cannot control the impact of the market or economy when it comes to mortgage interest rates. That said, there are more than a few factors that you can control, such as the state of your financial portfolio, the home you are planning to buy, and these factors mentioned below.
One of the most important factors that influence an interest rate is your credit score. Lenders have different credit score requirements, but most have a tiered rating system. Those with excellent credit scores qualify for the best interest rate, and good credit scores may qualify for a slightly higher interest rate. Because of this, you may consider learning more about your credit score and taking time to correct any errors that may be resulting in a lower score.
Besides, the amount of your down payment will also play a role in your interest rate. The desired down payment may vary from lender to lender, but as a rule of thumb, the best home mortgage interest rates tend to be given to those who have at least 20 to 30 percent of funds available to put down, and this does not include subordinate or secondary financing. Similarly, you can use your discount points to lower your rate, which in essence just means paying more upfront. The same is also true when it comes to applying for a higher loan-to-value loan. Here, you are putting more money down to improve your chances of loan approval, cut down on your loan fees, and get a lower mortgage rate. Note, if you are applying for a higher loan-to-value loan, there is still a strong likelihood that you may receive a higher interest rate.
Additionally, the total loan amount and loan features also influence the rate. There are different loan programs available, but one of the biggest differences in residential loans is for very large loan amounts. The qualification for a jumbo loan will vary for different markets, but these loans qualify for different rates than conventional loans with a smaller loan amount. Likewise, choosing a loan with a shorter fixed-rate period or one with a 15-year amortization instead of a 30-year term can save you a lot in interest. Therefore, it is important to choose wisely if you are looking for the most savings.
Other mortgage rate factors to keep in mind also include your intended home use, property type, property location, and even the amount of business your prospective lender is currently processing. When it comes to your intended home use, this refers to whether this property will be your primary residence, a rental/investment, or a vacation home. The type of property you are considering also plays a role. For instance, if you are purchasing a multi-family home or a condo instead of a single-family residence, then this will affect your mortgage rate. Furthermore, state laws can affect lender costs as well. But be that as it may, you won’t know for sure what your specific rate is until you get a customized mortgage quote based on your financial portfolio and specific set of circumstances.
Finally, in addition to everything mentioned above, mortgage rates are always changing. Thus, here the best course of action is to lock your rate quote, especially if your closing date is near. This will ensure that you are protected against unexpected spikes and therefore it is worth remembering.
Looking at general rates shown on most sites online will give you an idea of the approximate rates available at any given time; however, unless you are getting a quote specific to the parameters entered like our custom Rate Quote Tool, those quotes will be approximations and give you little insight as to what terms you may qualify actually for. Ultimately, you can contact a mortgage lender today to request more information about today’s rates, how to begin the pre-qualification process, and what documentation you will need to get pre-approved.
Do you have questions about home loans or how you can get approved? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.
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