Six Important Considerations Which May Factor Into Your Mortgage Rate
Your mortgage rate can make a big difference in the amount of money you end up paying each month and your overall costs of financing a new home. As a potential homeowner, your interests lie in getting the lowest rate possible. Any lender you choose must account for all the potential risks they take on by lending you the amount you’re requesting.
Obtaining a mortgage rate that fits your budget takes more than a good credit score. A lot of other things go into determining your final mortgage rate, including federal fiscal policies and other economic factors. Let’s go over the six most significant considerations lenders assess when deciding on a mortgage rate for the loan amount you’re looking to obtain.
1. Your Credit Score
The first thing most lenders do is pull your FICO credit score. FICO takes the following items into account when calculating your score.
- Your history of making payments
- The length of your entire credit history
- The way you’ve used your credit
- The overall mix of your credit accounts
- New credit accounts you’ve opened
Part of the reason lenders looks at your score is to determine how likely you are to make your mortgage payments on time. You can be negatively affected if you have a history of missing or defaulting on other loans or credit cards.
The best thing you can do before applying for a mortgage is checking your credit history. Look for anything that mortgage lenders might review negatively and attempt to work out the issue with that creditor. A stable credit history is an essential factor in getting a workable mortgage rate.
2. Your Down Payment
The amount of money you’re able to put down can have a significant effect on your mortgage rate. The larger your down payment, the less risk the lender is forced to cover. That makes them more willing to negotiate on a better mortgage rate.
It’s not always possible for potential buyers to have a significant amount of cash in reserves for a down payment. Look for a lender willing to work with you on the amount you have without charging you excessive fees in return.
3. Your Loan Amount
Many borrowers believe that having a lower mortgage will automatically get them a better rate. This isn’t always true. Keep that in mind if you’re in the market for a more modest mortgage loan.
Substantial loans, also called jumbo loans, can also cause lenders to charge you a higher mortgage rate since they’ll be taking on more risk. The limits of a jumbo loan can vary depending on where you live and the average home price in your area.
4. The Type of Loan You Take Out
Conventional loans usually come with a 15 to 30 year payoff period and have stricter eligibility requirements. The Federal Housing Administration (FHA) also offers loans that allow you to make down payments that are as little as 3.5% of the cost of your home. These loans also carry better interest rates than you might qualify for with a conventional loan.
Keep in mind that your lender might require you to take out additional mortgage insurance with some FHA loans. That protects the lender if you’re unable to fulfill your mortgage obligations. It’s best to sit down with your lender and explore the options available to you.
5. Your Interest Rate
Most lenders will allow you to choose between two types of interest rates. A fixed-rate mortgage is just that, a set amount you’ll pay throughout the life of your loan. An adjustable-rate (ARM) mortgage can offer you lower payments than a fixed-rate mortgage for the first five to seven years of your loan. Once that period ends, your rate can change based upon the specific terms of your ARM.
That might sound good, but keep in mind that if interest rates spike during periods of economic uncertainty, your mortgage payments will as well. You could be hit with much higher rates in the later years of your loan than you might have paid with a fixed-rate mortgage.
6. External Economic Factors
While you can do your legwork when it comes to the above, outside external factors can still vastly affect the mortgage rate offered by lenders.
- Inflation — Inflation rates affect the returns lenders see on their loans so that they may raise their rates accordingly.
- Positive Economic Growth — While a bustling economy is good in many ways, it can lower the amount of funds available to lenders. That can lead to them raising rates to take advantage of a competitive market.
- Monetary Policy — There’s a reason financial analysts pay so much attention to how the Fed adjusts the money supply in the market. Higher money supply means lower rates, while lower supply raises them.
Taking the time to research available options can pay off in the end, potentially with a better mortgage rate. By educating yourself you’ll be better positioned to discuss the choices available to you with your lender.