Interest rates

Real Estate Review: What Factors Influence Mortgage Interest Rates?

When looking for a loan, most borrowers look for the one that offers the lowest mortgage interest rate. A low interest rate means cheaper monthly payments, so the borrower will save money over the life of the loan. Below are common factors that influence mortgage interest rates.

1. Credit score

One of the main contributors to a mortgage rate is the borrower’s credit report. A credit score is a summary of your borrowing history, including late payments, inquiries, credit cards and/or loans. The purpose of a credit score is to give the lender an idea of ​​how risky a particular borrower is; the higher the credit score, the less risky the borrower.

Generally, a borrower with a high credit score will be rewarded with a lower interest rate by a lender. However, before applying for a mortgage, you should check your credit report which can be obtained free of charge every 12 months from the credit bureaus. Once you’ve received your credit report, make sure it’s accurate. If you come across incorrect reports about your history, dispute them with the credit bureaus to make sure your report is accurate when your lender reviews it.

2. Location

Interest rates may vary depending on the location of the property you are looking to purchase. There are several reasons why location may influence the interest rate you may qualify for; one is because states have different foreclosure laws. Other borrowers in the area can also impact the interest rate, as lenders take into account the default rate of homeowners in the geographic area.

3. Type of ownership

Interest rates for condominiums are generally higher than those for single-family residences because condominiums have higher foreclosure rates than LICOs. A second home or investment property will require a larger down payment and will generally require higher credit scores, as investment properties and second homes have higher foreclosure rates than owner-occupied properties.

4. Occupancy

An owner-occupied property will have a lower interest rate than a second home or investment property. A real estate investment rate can be up to 1% higher depending on credit rating and down payment. This can be mitigated by a larger down payment which reduces the risk for the lending institution.

5. Deposit

The higher the down payment, the lower the interest rate. A lender considers a borrower to be lower risk if they invest more in the home, which will reduce the amount of funds that will be borrowed. If the borrower invests less money in a property, it is considered a higher risk and is less favorable in the eyes of the lender.

Those who provide a 20% down payment on a home should qualify for a lower interest rate than a borrower who only provides a 5% down payment. If you deposit less than 20%, you will need to pay for private mortgage insurance, which will also increase your overall payment.

6. Current market interest rates

The Federal Reserve does not set mortgage interest rates, but it does set federal funds rates, which are the rates that financial institutions charge to lend funds to each other. The higher the federal funds rate, the more expensive it will be for the institution to borrow funds, which will lead to higher interest rates on products such as HELOCs, car loans and credit card debt. credit. Federal funds rates have an indirect impact on mortgage interest rates based on the bond market. More discussion of this complex relationship will be in future articles.

7. Duration of the mortgage

Short-term mortgages come with lower interest rates because lenders view borrowers who need a long-term loan as riskier than those who need a short-term loan. If a borrower chooses a 30-year loan, this gives the borrower more time to potentially default on the loan, whereas a 10- or 15-year loan would be considered lower risk.

8. Type of loan

Common types of mortgages include Conventional, Jumbo, VA, FHA, and USDA, and interest rates vary between these loan types due to different qualifying requirements. Most jumbo loans will require at least a 10% down payment, while conventional loans only allow a 3% down payment. Loans like VA, FHA, and USDA are government-insured loans that often have lower interest rates because they are government-insured.

The bottom line

There are many variables that determine mortgage interest rates and understanding these factors can help you choose the best mortgage product for your situation. Since your mortgage interest rate can be influenced by a combination of these factors, the best way to determine what your rate will be is to speak with one of our local expert loan officers.