The interest rate tied to your mortgage directly affects how much you are required to pay over the term of your loan. If you are considering purchasing a home, researching the market’s current interest rate is essential. There are three major factors that can influence the interest rate you can lock in for your mortgage.
Your Credit Score
Along with your income, employment, and assets your credit profile is crucial during the pre-approval process and determining your mortgage interest rate. Credit scores can influence an interest rate by as much as 1%, and credit reports only remain valid for 90 to 120 days. 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 specialized software that works with JVM’s internal credit reporting system. Higher credit scores not only qualify you for more loans, but they also qualify you for lower mortgage rates. If you pay your bills on time and have smaller amounts of debt, you likely have a higher credit score. However, a single late payment, or running the credit report when balances are high can easily reduce a score by as much as 50 to 100 points.
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 inquires to their score.
Your down payment amount also affects your mortgage interest rate. Higher down payments result in lower loan to value ratios (LTVs). If a borrower decides to put down only 20% instead of 24%, their rate will be at least 1/8% higher (or more depending on credit scores). Lower LTVs generate lower levels of risk associated with your loans. Down payments help lenders assess the mortgage’s loan-to-value ratio (LTV).
Lower LTVs generate lower levels of risk and therefore, lower mortgage rates. When lenders get riskier loans, they compensate with higher rates. Putting 20% or more down in your down payment allows you to avoid 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.
Types of Interest Rates & Mortgage Programs
The loan type that you use for your mortgage also comes with different interest 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.
There are a few different loan programs available; each has been covered in great detail on other posts. These include:
Different lenders offer a variety of mortgage programs. The type of loan program you choose may offer different interest rates, and each program has different qualification requirements.
This blog covers the basics of these three factors can affect mortgage interest rates for homebuyers. To learn more about how you can get pre-approved, secure a low mortgage rate, and the other factors that influence the mortgage rate for your home loan, you can contact our expert team of Mortgage Analysts. Our team is available 7 days week by phone at (855) 855-4491 or by email at [email protected].