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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 the loan.

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.

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