WHAT AFFECTS YOUR INTEREST RATE WHEN GETTING A MORTGAGE LOAN?
By Brad Hudson | September 1, 2020
With mortgage rates at all-time lows it’s not unusual to have a conversation with family, friends, coworkers, etc. regarding mortgage rates. Many times, you are left wondering why someone you discuss rates with said their rate they received was lower than yours yet you seem to both have excellent credit. There are quite a few factors considered when being offered an interest rate for a mortgage loan that makes your scenario unique versus someone’s you may be comparing to.
As expected, this starts the process of qualifying. Lenders use your median FICO score and the other two are irrelevant. The higher the score the better the rate. Lower scores not only lower your rate, but if too low, would not allow you qualify for a loan.
Certain ranges of loan amounts are more attractive to investors. Investors are willing to give the best rates to higher loan amounts such as a $400,000 compared to small loans such as $50,000.
Loan Amount to Appraised Value:
This is very important. When your loan amount gets closer to the value of your property, your rate will not be as good as if you had more equity in the property. This is due to risk of the investor not being able to recover their funds if the loan goes into default.
Is the property your primary residence, second home, or an investment property? Primary residences offer the most attractive rates. Investment property rates are the worst. Investors know you are more likely to make payments on your primary residence compared to an investment property if you fall into financial trouble.
Type of Property:
Single family residences (SFR) offer no adjustments to your rates but condos, 2-4 unit, and manufactured properties all may have adjustments that affect your rate.
Type of Loan:
This is an important factor. Purchases, rate term refinances, cash out refinances, FHA, jumbo, VA, and USDA all will affect the rate. It is not uncommon for investors right now to offer better rates for purchases compared to refinances due to the demand of refinances. Cash out refinances are also very different in pricing compared to simply refinancing your rate only.
How long of a loan term is your loan? Shorter loan terms such as 15 year loan will have a better rate than a 30 year loan.
Fixed vs. Adjustable:
Adjustable rates will offer a lower rate than a fixed rate. The borrower gets a lower rate in exchange for the rate possibly adjusting in the future.
Costs or Credits:
You may decide it makes sense to pay extra fees (referred to as points) to buy down your interest rate to make it even lower. Some scenarios make sense to take a higher interest rate and receive a credit back to cover transaction costs such as title fees, underwriting, etc. Scenarios and goals will differ for every individual.
What Lender You Choose:
Smaller lenders will likely have better rates to offer than bigger banks. This is because their overhead is lower which allows them to not have to charge higher rates to cover costs. Also, smaller lenders usually use multiple investors to allow them to find the best rate for your unique scenario compared to a big bank that offers one set of products that your scenario either fits within or doesn’t.
Quote vs. Rate Lock:
This is a big one when comparing your rate in a conversation. Many rates like you will see online are simply quotes tailored to the top tier scenarios. A locked rate usually means your loan officer has at a minimum gone over all of these qualification points with you. A 60 day lock will not offer as good of a rate as a 15 or 30 day lock. Also, comparing a rate that someone had locked in days or weeks ago will not give you an accurate picture as rates are always adjusting and not static.