Every borrower wants to get the lowest mortgage rate when applying for a mortgage loan. JVM is proud to offer our buyers some of the lowest rates in the industry. But, few buyers are aware of the many different factors that could affect the mortgage rate they are given in California.
Here are six factors that could impact the rate you receive from your lender.
1. Property Type
There are different mortgage rates for different property types. Property types can vary between single-family detached homes, duplexes, or condos. Each of these property types have an associated loan default risk. Mortgage rates will vary between property types to reflect that risk.
A single-family detached home will typically have better rates than condos. Condos can be considered riskier and therefore have higher mortgage rates. Condo financing has a particularly higher interest rate if the Loan-to-Value (LTV) ratio is over 75%.
2. Primary Residence vs. Second Home vs. Investment Property
The occupancy of your property also plays a role in determining your mortgage rate. There is a difference between Primary Residences, Second Homes, and Investment Properties.
A Primary Residence is a property that you plan to live at for most of the year. Primary Residences usually qualify for lower mortgage rates.
A Second Home and Investment Property may require a higher credit score and are usually associated with a higher rate due to increased risks to the lender. A conforming loan that has been backed by Fannie Mae or Freddie Mac has no adjustment rate mortgages for second homes and investment properties. However, many Jumbo loans are available for these properties. Jumbo loans can tend to have higher rates and higher down payment requirements. At JVM Lending, we have some of the lowest rates in the industry for Jumbo loans.
3. How much you put down
Your down payment amount also affects your mortgage rate. Higher down payments result in lower loan-to-value ratios (LTVs). Lower LTVs generate lower levels of risk associated with your loans.
When lenders get riskier loans, they compensate with higher rates. Putting 20% or more down in your down payment allows you to forgo Private Mortgage Insurance and further improves the terms of your loan. Purchasing a home with a higher down payment can also help decrease the effects of a negative credit score on your application.
4. Credit Scores
Along with your income, employment, and assets your credit profile is crucial during the pre-approval process and determining your mortgage rate. Higher credit scores not only qualify you for more loans, they also qualify you for lower mortgage rates.
Your credit score is determined from three different places: Equifax, TransUnion, and Experian. At JVM, we use Fannie Mae’s and Freddie Mac’s specialized software as part of the pre-approval process. Credit scores are generated through a specialized software that works with JVM’s internal credit reporting system.
If you pay your bills on time and have smaller amounts of debt, it is likely that you have a higher credit score. Credit reports and information provided by third parties cannot be verified as 100% and should not be relied on when the stakes are so high with pre-approvals and mortgage rates. Always make sure you are using a trusted lender when getting your credit information.
We see a lot of clients worry about lenders pulling their credit score – they’re afraid it will bring their score down. In this blog post from JVM’s founder, Jay, he explains why lenders must pull credit and why buyers don’t need to worry about inquiries to their score.
5. Loan Type and Amortization
The loan type that you use for your mortgage also comes with different rates. A fixed-rate loan tends to have higher rates initially, but that rate stays the same for the duration of your loan. In comparison, an Adjustable Rate Mortgage (ARM) may have a lower rate to start, but that can fluctuate or even rise over time.
The length of your loan also plays a role in your rate. Shorter fixed-rate terms such as 15-year or 20-year fixed loans can improve the terms of your loan rate and reduce the amount of interest you pay over the lifetime of your loan.
6. Market Rate Changes
The market is a powerful force in determining mortgage rates, and unfortunately, it is always changing. This past year, mortgage rates went up about ½ percent and they are expected to continue to increase. This is due in part to the Federal Reserve raising its short-term Federal Funds rate and because they have stopped buying mortgage-backed securities and started to sell them.
For now though, mortgage rates have leveled off and some have even gone down. It is likely that rates will start to increase again due to the Federal Reserve’s desire to fend off inflation. To read more about why and how mortgage rates have been fluctuating this past year, check out this blog from Jay.