07/12/2023
Q: How will my mortgage lender calculate my interest rate?
If you're thinking about taking advantage of the low-interest rates to buy or refinance a home, you might be wondering how exactly your lender will determine your rate. Rates may be increasing, but historically they are still low.
Lenders assess mortgage rates depending on how risky they judge the loan to be. A riskier loan has a higher interest rate. They determine the risk by evaluating a few factors:
💳 Credit score - The higher your score, the lower your rate is likely to be. Generally, the lowest rates go to borrowers with scores of 740 or higher. If your score is lower, you can still qualify for a loan but you may pay more interest.
💰 Down payment - You do not need 20% down, but if you put less than 20% down, your lender may require PMI, or mortgage insurance, and require a slightly higher rate.
⏳ Loan term - In general, shorter-term loans (15-year vs. 30-year) have lower interest rates and lower overall costs, but higher monthly payments.
📑 Loan type - Types of loans include conventional, FHA, and VA, to name a few. Different lenders offer different loan types, so it's a good idea to shop around with different lenders to understand the options available.
🏦 Interest rate type - Fixed interest rates are locked in, and adjustable rates fluctuate based on the market after an initial period. With an adjustable-rate loan, you might qualify for a lower rate earlier on, but then over time, your rate could gradually increase.
Of course, there are other factors involved that determine interest rates: the location of your home and overall economic factors. If you have Q's about what rate you might qualify for, shoot me a DM.
