When it comes to mortgage rates, there are a whole host of factors which go into determining how much a homeowner will pay; however, while some of it has to do with the current housing market and the state of various government programs, a large portion has to do with the borrower.
While a buyer’s income, debt profile, and down payment abilities all come into play, the main component revolves around the borrower’s credit profile—to include their credit score, debt-to-income ratio, and bill pay consistency.
In short, loans are always filled with some sort of risk for the lender. If a homeowner defaults or winds up having to foreclose on their house, the bank is left with the property, which can present a challenging problem when it comes time to find another buyer. Therefore, to help mitigate this risk, a home buyer’s credit profile winds up playing a big role in determining what interest rate will be assigned to the life of a loan.
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From there, the length of the loan also tends to directly impact the mortgage rate. In general, shorter term loans, such as 15- or 20- year loans, will have a lower interest rate than a 30-year mortgage.
After that, it’s important to note that different products show a variation in interest rates. For example, a buyer who’s incapable of putting 20% down may still be eligible for an FHA loan; however, their interest rate would probably be more than a 30-year fixed conventional loan. Additionally, if a borrower fails to put 20% down, they may also be required to purchase private mortgage insurance (PMI) since lenders will want to make sure they’re protected if the borrower defaults.
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In the end, while it’s virtually impossible for buyers to control all of the factors which come into play when determining their mortgage rate—especially since mortgage rates are more than just credit profiles— they can still work proactively to get lower rates. Start the process in advance and focus on getting pre-qualified before the house hunt begins. By assessing your credit score for errors, refraining from making any large purchases, and avoiding a job change, you’ll be on the right track to getting the best mortgage rate possible.
Pam Wright | OnQ Financial | www.onqfinancial.com | 404-445-1033
