Nine Factors That Affect Your Interest Rate
Not everyone qualifies for the same interest rate on a loan; the rate is determined individually using several factors. Here we outline nine key factors that help determine a person’s interest rate. As always, we are here to help you navigate the loan process and to help you learn how these factors affect your particular situation:
1. Your Credit Score
Your credit history, or FICO® score, is tracked by three different credit bureaus: Equifax, Experian, and TransUnion. When you make an application for a home loan, the lender will typically obtain a credit score from each of the three credit bureaus. Most lenders use the median (the number that is in the middle) as the score with which they will un-derwrite your loan. The higher your credit score, the better your credit grade. Most of the mort-gage products on the market usually have a higher rate for lower scores and a lower rate for higher scores.
In recent years, companies such as Scorelogix, PRBC, and Innovis have developed their own formulas to predict creditworthiness. Some lenders may consider data from non-traditional sources such as these in conjunction with a traditional FICO® score in order to further assess a borrower’s ability to repay the loan.
2. Your Loan-To-Value (LTV)
Otherwise known as the down payment you provide; most traditional loan products that offer the most aggressive rates require at least 5% down.
3. Your Debt-To-Income Ratio (DTI)
Traditional underwriting guidelines require very spe-cific documentation to prove your income. That income must be enough so that your DTI is somewhere between 40% and 50% of your gross monthly income. No more than 40% to 50% can be dedicated to your new housing payment combined with all of your other monthly debts. However, many borrowers today do not meet this guideline for various reasons.
4. The Escrow Account
Traditional mortgages require that the lender set up and maintain an escrow account to save and pay for the homeowner's insurance and property taxes. However, many borrowers would rather manage those funds themselves. Taking these payments into your own hands may add slightly to your interest rate.
5. Timing on the Closing
Interest rates are usually locked for 15, 30, or 60 days. The longer your lock-in period, the higher the interest rate will be. However, if you are building your home and the projected completion is 60+ days out, Starkey Mortgage offers an impressive extended-lock program that will allow you to lock in with a protective capped rate—so if rates go up, you are protected. AND if rates go down 30 days prior to your scheduled closing, then you can lock in at that lower rate—a true win-win for the borrower!
6. The Party Responsible for Closing Costs
Many borrowers have a limited amount of funds available to use in the purchase of their new home. What many do not consider is that closing costs have to be paid in addition to the down payment. There are three options available to pay closing costs:
- You can pay closing costs yourself out of pocket. This is the lower rate option.
- You can negotiate with the seller to pay part or all of them for you. You will still get the lowest rate, but the cost of the house will likely go up.
- Your lender can pay them for you and build these costs into a higher interest rate.
7. The Type of Program You Choose
The longer the term (i.e., 15-year, 30-year, 40-year), the higher the interest rate. Fixed rates are higher rates than Adjustable Rate Mortgages (ARM). The longer the ARM fixed period is, the higher the rate. If you add an interest-only option to your loan, your rate will likely also be higher. There are a number of other options that could add to the interest rate. Be sure to ask about the pros and cons of each program to help determine which one will be most beneficial to you.
8. The Size of Your Loan
Interest rates vary depending on the size of your loan. The best rates available are for loans between $60,000 and $417,000. Loans for less that $60,000 or greater than $417,000 have a higher interest rate because of the size of the loan.
9. The Type of Property
Rates may vary depending on whether you intend to live in your house (owner-occupied) or plan to rent it out (investment property). Properties other than a sin-gle-family residence can also impact your interest rate.