Items that will affect your
Mortgage Rate
Many different items will have an effect on just what rate you will be able
to secure when obtaining a mortgage. This is one of the main reasons that it
makes it difficult to compare quotes.
Here is a list of 9 of those items. Remember that due to so many different things
that can determine what mortgage rate you really should get, this makes it very
difficult for the banker on the other end of the phone when you "call for
a rate"
If you really want to get an accurate quote when you call, be ready with the
particulars for your situation for each of these items.
Loan Amounts
The best rates available are for loan amounts between $150,000 and $359,600
for 2005.
The rate you pay on your mortgage will be higher if the amount you finance exceeds
the conforming limits established by Fannie Mae and Freddie Mac each year. For
2005, the amount established is $359,600 for a 1 unit property.
Loan amounts smaller than $150,000 often pay a higher rate due to the bank wishing
to make a predetermined amount of profit off of eash loan they provide. The
$150,000 can vary from bank to bank. This is just an example, but let's say
that the bank wants to make a minimum of $1,500 on each loan and the bank makes
a profit of 1% on a loan. In this example, the bank would charge a higher interest
rate for loans smaller than $150,000 to make up for their lower profit margin.
Length of Loan
Surely you have noticed that rates are lower on a 15 year mortgage than on a
30 year mortgage. The shorter time a bank has to hold a mortgage note, the less
risk that this loan may not be paid off and the sooner that money will be able
to be used again and loaned to someone else. This is translated in the form
of lower rates to you.
Taking an Adjustable Rate Mortgage or ARM
Rates on ARM's will be lower and lower the shorter the time that the rate is
fixed.
A 3 year ARM has lower rate than a 5 year ARM.
A 5 year ARM has a lower rate than a 7 year ARM and so on.
These rates are lower for the same reasons specified above for length of loan.
Down Payments
The higher the down payment or equity you have in the home, the lower the interest
rate.
There are generally 4 tiers of rates.
20% downpayments - The rates that are most commonly posted and quoted
5%-20% - These mortgages carry a higher rate and often require more documentation.
5% or less down - An even higher rate comes with these loans and will require
more documentation
100% mortgages - The highest rates and the most restrictions.
Some banks even have a 5th tier of rates for those borrowers with more than
40% equity in the home and offer an even lower rate for thse borrowers.
This is because the more equity that you have in your home, the less risk
there is for the bank giving you the loan. In addition, the higher the equity,
the less restrictive the rules are for obtaining a mortgage.
Paying Points
Whether or not you choose to pay points is the easiest way to change the interest
rate you pay on your mortgage. Paying points is simply paying interest up
front on a loan.
Negative points are often used to cover closing costs or create a no-cost
loan. Be careful here, you are better to ask for negative points than a no-cost
loan because certain mortgage professionals use this as a way to put more
money in their pockets.
Read our articles about paying points
for more details. This is the best way to save money on a mortgage and if
are knowledgeable about the process, you can use it to your advantage.
Closing Costs
Lower Closing Costs will equal a higher rate.
As you shop across the web, you will undoubtably see quite a variety of costs
to do a mortgage. Please understand that the costs are the same for every
loan, it is just that some lenders choose to pay the costs rather than charge
them to you. You will pay for this in a higher rate.
We all know that the appraisal was not done for free just because you
didn't write the check.
Credit Scores
The Higher the Credit Score, the lower the mortgage rate. Scores above 720
will get the lowest available rates, scores between 660 and 720 will get lower
rates but will also get requests for more documentation in many cases.
For a more complete explanation, please read our Credit
Scores article
Debt-to-Income Ratio
The more debt in the form of monthly payments that you have in relation to
your income, the higher your mortgage rate will be.
Rates begin to get higher when your mortgage payment, taxes, insurance and
other monthly payments are above 28% of your monthly income.
Higher debt also affects your credit scores. People who make quite a bit of
money, but also have quite a bit of debt are often surprised to learn they
have lower credit scores, even though they can very easily make all the payments.
Lock in Period
The longer you lock in the rate, the higher the rate wil be.
Rates can be typically locked in for 15, 30, 60 or 90 days and each has a
different rate associated with the length of time.
You also have the option of paying a fee to lock in longer while keeping the
rate the same.
Summary
Be ready to take some time to cover the aspects of your situation in order
to get an accurate quote.
With so many different items that can change your mortgage rate, it makes
it very hard for a banker to qoute you an accurate rate when you call up and
say "What's your rate?"
In addition, just knowing that there are so many factors affecting your rate
may help you in finding someone you can work with that will treat you fairly.
If the person you call does not ask you all these questions to give you an
accurate quote, will they really be giving you the best rate?
DailyInterest.com
is brought to you courtesy of Scott Campbell of
30800
Telegraph Rd, Suite 1801
Bingham Farms, MI 48025
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