Home Loan Rate – What Are The Variables That Affect The Rate?

Home Loan Rate – What Are The Variables That Affect The Rate?

June 13, 2022 Off By Jennie Cox

Are you about to buy a home? Would you like to reduce your potential mortgage payments? Then learn as much as you can about the variables that affect the interest rate. The home loan rate will determine the amount that you’ll pay your lender over time. You can compare home loan rates to see the effects. Even a fraction of one percent has a massive difference on the final figures. Put yourself in a good position to negotiate a lower rate. Make the right moves on the following:

1. Credit Score

The credit score is an indicator of a person’s ability to pay back what they owe. The number increases as you make timely payments on other loans such as credit card purchases, car loans, student loans, and so on. It decreases if you miss payments or make other questionable financial decisions. A low score makes lenders see you as a high-risk borrower. They might deny your loan application outright. If they approve your loan, then it will probably come with a high interest rate. Strive to increase your credit score before submitting a loan application to enjoy low rates.

2. Down Payment

Lenders don’t usually provide the full cost of the home being purchased. They want the buyer to sink their own money in the form of a down payment. Since borrowers have a significant stake in the house, they are less likely to simply bail out when things get hard. The down payment is commonly pegged at 20%. Anything lower may require the purchase of mortgage insurance which adds to the overall cost. Anything higher will impress the lender about your commitment to the purchase, as well as your financial capacity to pay them back. They are likely to cut the interest rate for such an ideal borrower.

3. Loan Term

The high price of homes forces people to stretch out their loan terms just so that the monthly payments would be affordable. It is common for complete payment to take several decades, such as 30 years. A lot of things can happen within that time span. The borrower could get severely ill, laid off from work, or otherwise unable to push through with the monthly payments. The faster it’s finished, the lower the risk of default. That is why you will see lower interest rates on 20-year and 25-year loan terms than on 30-year terms. Check your finances if you can afford the monthly payments on a shorter term.

4. Property Location

The interest rates are not the same everywhere. Some states may have it higher than others. You may want to think about this if you are not yet certain about where you plan to purchase your home. There may also be a significant difference between the rates in rural and urban areas. Do your research so you know exactly where you can get cheaper loans. You should also talk to multiple lenders because some of them may be more accommodating to your loan application than others. You may even get promotional discounts and other perks if you choose one over their competitors.

5. Interest Type

Be mindful about the interest type of the home loan that you are signing on. Some of them have a fix rate, which means that what you agreed on at the start will stay the same until the end of the term. Others will have a variable rate, in which the initial percentage will only hold for a certain period. After this, the rate could go up or down depending on the market conditions. Many are tempted to go for variable rate loans because of their low initial interest. However, the risk that it may go up significantly higher should not be dismissed.