If you’re in the market for a mortgage, it’s a good idea to understand how lenders arrive at their interest rates. Doing so ensures you don’t get the short end of the stick while applying for your mortgage.
Approximately 44% of consumers in the US take out mortgages; that’s almost half of all consumers. Mortgages have allowed individuals from all walks of life to afford their own homes. If you’re in the market for a mortgage, it’s essential to understand how lenders arrive at their interest rates. Doing so ensures you don’t get the short end of the stick while applying for your mortgage.
In this article, we’ll be highlighting a couple of factors that affect the mortgage interest rate. So without wasting time, let’s get right into it.
1. House Price and Loan Amount
How much you need to borrow on your mortgage depends on the price of the house, minus the deposit and closing costs. Lenders will look at something known as the loan-to-value amount when deciding interest rates. This is how much your mortgage is compared to the value of the home—the lower the loan-to-value ratio, the lower the interest rate your mortgage attracts.
2. Credit Scores
Lenders will look at your credit score to determine your mortgage viability and your interest rate. Typically, the higher your credit score, the lower the interest rate you should expect from the lender. Credit scores show how reliable you are in repaying your loan. Your credit score is a culmination of information from credit reports, credit cards, and other loan histories.
It’s essential to check your credit score before you look for a mortgage. Doing so lets you know what interest rate you should expect from the lender. There are many ways to get your credit score; choose one that suits your needs.
3. Location
Different states have different interest rates, with some being much higher than others. The disparity in interest rates is because of factors like competition, foreclosure laws, and the likes. States with lower loan amounts have high-interest rates. That’s because it’s much easier for lenders to sell these types of loans. It’s hard to say the same for large mortgage loans.
Remember, the lender also has to make up for rent and property taxes, plus legal fees. That’s why interest rates tend to be higher in some states than others.
4. The Loan Term
The longer the loan term, the higher the interest rate you should expect to pay. However, mortgages with shorter repayment periods tend to have lower interest rates.
That’s because borrowers are less likely to default on short-term mortgages. However, with long-term mortgages, anything can happen between the repayment period to hinder the borrower from fulfilling the loan. That’s why long-term mortgages attract higher interest rates.
Know Your Interest Rates
There are tons of factors that affect your mortgage interest rates. Knowing them will help you prevent any upselling by the lender. Remember to get your mortgage from reputable mortgage lenders with no hidden fees. You can use our custom mortgage calculator to get started.
