What Level of Interest Rate Will You Expect to Get for Your Loan?
Posted by: Guest Author / Category: MortgageIf you are shopping for a mortgage, you of course want the best possible rate. This is a decision that you will live with for many years. How do the banks determine the rate they quote you in the first place?
And once you know how those rates are determined, is there something you can do to get the best rate for your mortgage?
The one item that has the most impact on the level of the interest rate is the credit standing of the borrower. If you have heard discussions, or seen constant ads on the internet about your “FICO” score, you may now what the buzz is about.
A FICO score is a rating that credit agencies such as Equifax put on each individual who requests credit. Banks subscribe to these agencies to receive this information. They are primarily determined by income level, job history, and history of credit payments.
Another factor that banks use to calculate the rate is the size of the deposit.
The more you deposit, the better the mortgage rate, since the bank’s risk exposure is reduced as the amount of the loan in reduced.
Consequently, the higher the deposit you are willing to make, the better the rate will be deposit. In order to save for a higher down payment, the longer you would have to pay rent, so that tradeoff has to be taken into account.
Another important factor in the determination of a loan rate is the maturity of the loan. The longer a bank has to be committed to the risk of your mortgage, the more they want to be rewarded for taking that risk.
Taking a shorter maturity on your mortgage, such as a five year loan instead of a 25 year traditional loan will result in a lower rate for you. However, many people still prefer to negotiate a longer term loan if they can because they fear that interest rates will rise and they will constantly have to renew their mortgage at a higher rate.
Which is what leads us to the next determinant for interest rates, one which you have no control over: economics. Since banks have to borrow on other markets in order to lend mortgage money, the cost of their money goes up and down. These market rates are set according to complex economic indicators.
This is why many people choose to pay a higher rate for a longer term mortgage and forego the risk of having constantly rising increases in their mortgage payments. (The opposite could happen, where interest rates fall and you are stuck with a 25 year higher rate mortgage.)
A final factor is the size of your mortgage. Banks have limits as to the size of the mortgages they can write, and a borrower who requires a higher loan than that, even if they have the income to support it, will most likely pay a higher rate.
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