The mortgage process can be complicated if you jump in without any prior knowledge on home-buying and lending. One of the best tools you can arm yourself with (besides a trustworthy lender and Realtor) is an understanding of how your mortgage interest rate is calculated.
Credit Can Make or Break You
Your credit score will determine how reliable you are in the lending world. The higher your score, the lower your interest rate will likely be. Check your credit on one of the three major credit reporting agency sites—TransUnion, Experian and Equifax—or your credit card company may have a free credit report service (although these aren’t as reliable). Take steps to improve your FICO score for a better chance at a lower interest rate.
If there is anything on your credit score and credit report that doesn't look right, track it down and fight to get it off your report. It is possible to correct mistakes on your credit report.
Here are some other things that can affect your interest rate.
Size and Location Matter
- State or County: Even your place of residence can affect your interest rate.
- Mortgage Lenders: Shop around with multiple lenders, including local ones. Interest rates can vary from company to company, even if they’re located in the same town.
- Loan Size: The size of your mortgage can also impact your interest rate. The bigger the loan, the higher your interest rate will be if you’re not putting more money down.
- Down Payment Size: Your mortgage interest rate may also depend on how much you’re putting down and if your loan includes closing costs and private mortgage insurance (PMI). Putting down less than 20 percent can increase your risk factor and may require PMI, but your interest rate may be lower depending on the loan.
- Is it a Condo or Fee Simple? Typically a condo is going to have a slightly higher interest rate. Be prepared for that and ask each lender how much the condo premium is going to be.
Not All Loans Are Created Equal
Loan Length: Your loan term plays a bigger role in interest rate calculations than you think. Have you decided whether you want to pay off your loan in 15 or 30 years? You may pay more per month with a shorter term, but you’ll be paying less interest over the life of your loan. Short-term loans may also have a smaller interest rate.
Fixed or Adjustable: You’ll also have to consider whether a fixed- or adjustable-rate loan is right for you. Your interest rate can change over time if you choose an adjustable-rate loan. It typically starts off lower than with a fixed-rate loan, but will likely increase depending on market conditions.
Loan Type: Interest rates can also vary according to your loan type. Choosing a loan can be overwhelming, but talking to multiple lenders can help you understand your best options. Some of the more popular loans are conventional, Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans. While FHA loans have less down payment restrictions and a smaller interest rate, your monthly payment can be more expensive due to the required PMI added on. VA loans can have smaller interest rates and don’t require PMI like FHA ones do. Although conventional loans may have higher interest rates, they are widely accepted in the real estate industry as dependable
If you are looking for a home in the DC metro area, please reach out and ask me for for my list of reliable lenders. You can call me at 240-401-5577 or email me at lise@lisehowe.com. I look forward to hearing from you!
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