Factors affecting the Interest rates
Typically, the higher the credit score, the buyer receives a lower interest rate. Credit score ranges from 300 - 850. This number helps show how Creditworthy an individual is. This score is based on the credit history. Lenders use this score to evaluate the credit risk, how likely is the individual capable to repay the debt on time. Everyone's financial situation is different and the lender's criteria for granting the credit also varies. You may get a lower interest rate when buying or refinancing your mortgage.
Location of your home
The interest rates offered by lenders usually vary depending on the location of your home. The loan products offered may also vary depending on the location of your home. There is potential for variation not only between counties and states, but also between urban and rural areas.
Price of your home
The price of your home also influence the interest rate as they are inversely proportional. Usually, if the Fed rises the interest rate, the affordability of the buyers decreases proportionally. So, the home prices start declining accordingly.
The interest rate also varies depending on the loan amount and the loan type. As some loan types such as balloon loans and interest only loans pose higher risk to the lender. Jumbo loans are the loans that exceed the limits of Fannie Mae or Freddie Mac. These loans cannot be packaged and sold in the market as other conventional loans. Thus, lenders charge a higher interest rate as there are higher risk associated with it.
Generally, larger the down payment lower the interest rates as it significantly reduces the lender's risk. If the down payment is lower than 20%, lenders usually charge the borrowers with PMI (Private mortgage insurance) to safeguard their given loan amount.
Length of the term
Shorter the loan term, quicker the borrower pays it. This reduces the lender's risk, thus offering a lower interest rate. Longer the term, the interest rates are usually higher.
The interest rates vary depending on the occupancy type. Usually, the primary residence occupied by the owner has lesser interest rate than the investment or rental property occupied by the tenant.
Date of closing
Depending on the market condition, the interest rate must be locked close to the closing date. The longer the rate lock period is the longer the interest rate is going to be.
Loan to Value
Loan to value ratio is assessed to calculate the lending risk of the lender. The loan amount is divided by the appraised value of the home. For example, if the appraised value of the home is $100,000 and the borrower is making a down payment of $80,000, then the LTV is 80%. Usually, lesser the LTV ratio, better will be the interest rate.
Some lenders prefer to have an escrow for the loan transactions. If the borrower prefers not to escrow, the lender may charge a higher interest rate due to high risk associated.
There are various types of loans such as Conventional, Adjustable mortgage, Balloon loan, Interest only loan etc. Depending on the loan, the interest rate varies. Initially. the interest rate might be lower in loans such as interest only or adjustable mortgage compared to the conventional loan. But, there are risk of interest rates rising after the initial period ends.
Frequency of payment
Some loans such as USDA (United states department of agriculture) loan, the payments may be structured to be semi annual or annual. This payment structure typically increases the interest rate of the loan.
The lenders have their own criteria for the debt to income ratio depending on the employment history, loan type, loan amount etc. Depending on the debt ratio, the interest rate fluctuates as high debt ratio puts the lender to a high risk.
The employment history and the type of employment also influences the interest rate. If the borrower has a consistent employment income history, then there are better chances of getting a good interest rate.
Higher the inflation rate, the interest rates usually rise high. The gradual increase in the prices leads to inflation and it reduces the purchase power of buyers overtime. The inflation and interest rates are directly proportional.