Here’s a follow-up to my blog What Makes Mortgage Rates Go Up and Down. Now let’s talk about What Determines a Borrower’s Mortgage Interest Rate?
As we discussed, many factors determine the interest rate on a particular mortgage. A borrower’s rate will reflect general conditions in the financial markets, the type of mortgage they chose, the lenders assessment of the risk involved in your financial situation and, of course your credit history.
That’s why a quick “rate quote” over the phone or a rate you saw online or pulled from a newspaper advertisement may not reflect the interest rate you will finally be offered once a lender has evaluated your specific circumstances as presented in your mortgage application.
When lending money to finance a home purchase, lenders and their investors seriously consider the risk that these borrowers may not repay the money loaned to them. For example: the larger the down payment, the greater the investment in the property and the lower the perceived risk. Therefore, the lower the mortgage interest rate. Vice versa: The smaller the down payment, the less equity in the home and the greater the risk of default. The higher the risk, the higher the interest rate
When someone calls me inquiring about interest rates, I tell them, “I don’t sell interest rates.” I go on to explain, “There is no “one low mortgage interest rate.” Rates fluctuate daily-even hourly-with movements in the financial markets. A borrower’s final interest rate is determined on the day it is “locked” by an assessment of:
• Mortgage type
• Mortgage term
• Loan amount
• Type of property
• Credit Score
• Debt-to-Income Ratio
• Amount of cash the borrower will contribute to the down payment, closing costs and points.
I might tell them, “Today, at noon on July 2, 2014, it is conceivable for a buyer want to buy a single-family home selling for up to $400,000 with a conventional 30 year fixed rate mortgage has a credit score greater than 740, is able to make a 20% down payment and is willing to pay all closing costs and about 2 points to get a rate in the 4.00% range. If any of these criteria do not fit your situation, then the rate will be higher. How does that sound to you?”
In the final analysis, it is the borrower’s unique personal situation that determines his/her final mortgage interest rate. His financial position will help him decide which mortgage program right for him and what interest rate scenario is right for his family budget, how big a house he can buy and how large a mortgage he can afford to repay. My job was to guide you to that decision.
Do not hesitate to reach out to me with any questions or concerns you may have about how your situation might impact your mortgage interest rate. I’m here to help.