Mortgage Rate Reasoning
You may be aware that mortgage rates are very much determined
by the capital market, but do you know the other factors that
can affect your mortgage rate? Some of them are things in your
control and that you can change in order to receive a better rate.
One factor affecting your mortgage rate is the amount of the
loan you obtain. If the amount of your loan exceeds the limit
amount dictated by Fannie Mae and Freddie Mac, your mortgage rates
will be higher than if your loan is less than or equal to that
conforming loan amount.
If you are deciding between obtaining a short or long term loan,
remember that short term loans will save you possibly thousands
of dollars, since the mortgage company is much more partial to
extend a short term loan with low interest instead of a long term
loan with higher interest. The shorter the term of a loan, the
more quickly the lender will be paid and the less apprehensive
the mortgage company will be to extend a loan to you.
If you have ad adjustable rate mortgage, you will probably receive
low interest in the initial payment periods, but eventually when
the rates begin to fluctuate and become dependent on the capital
market and mortgage rate index, the interest rates will rise according
to that index.
Down payments also determine your interest rate. If you put a
down payment of more than 20 percent the home value, you will
receive the best possible interest rate. If you pay less than
5 percent for your down payment you will get the highest interest
rate. The higher the down payment, the more home equity or collateral
you have, and the lower your interest will be. This is because
the mortgage company has more assurance that they will be compensated
for the loan they are extending to you.
Lastly, the quality of your credit and your debt-to-income ratio
will also affect your interest rate. If you have poor credit or
a large amount of debt in comparison to your regular income, the
lender will probably be suspicious of your ability to pay off
Extending a loan to someone with a history of debt and poor credit
is a risk on the mortgage company’s part, and in turn they
must higher the interest rate as fair payment for their services.