Mortgage Rates 101: Factors That Help Determine Your Interest Rate
Purchasing a new home can be an exciting undertaking. Most buyers opt to finance their homes through a mortgage lender so they can pay the purchase price over time. A mortgage loan is likely the largest loan that you will apply for, and it is a financial product you will be living with for a significant number of years. Securing the lowest mortgage rate possible can be beneficial.
You need to understand the factors that can affect your mortgage rate so you are prepared to determine if you are getting a good deal.
1. Credit Score
Your credit score plays a central role in determining your mortgage rate. Lenders want to know that they are extending a loan to a consumer who will make timely payments and repay the mortgage in full.
Your credit history (including the types of accounts you have, your payment history, and the ratio of debt to available credit) will be utilized by a mortgage lender to determine your rate. Buyers with a lower credit score will typically pay a higher mortgage rate because they pose a greater risk to the finance company.
2. Purchase Price
The amount of money that you spend on your home can also influence the rate a mortgage lender is willing to extend to you. Lenders like to make a profit off your mortgage. The rate determines the amount of interest that you will pay over the life of the loan, and this interest represents the profit to the lender.
A smaller loan will often come with a higher interest rate to ensure that the lender makes adequate profit off your loan.
3. Repayment Term
The term of your loan can influence your mortgage rate. Most mortgages can repaid in either 30 years or 15 years. A 15-year mortgage will come with a higher monthly payment, but these loans can have a lower interest rate.
The lender appreciates the fact that you are willing to repay your loan quickly, and rewards you with a slightly lower rate. This can save you a significant amount of money over the life of your loan. If you are able to be flexible with your repayment term, you can usually negotiate the best interest rate possible.
Understanding how mortgage rates can be influenced by your credit score, your loan amount, and the repayment term of your loan will allow you to use these factors to your advantage to score the best interest rate on your next real estate purchase.
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