The Most Important Factors that Affect Mortgage Interest Rate
Getting a mortgage can be a costly endeavor. The total costs of your mortgage can wind up rising due to several factors. The increase in the quote of your mortgage interest rate you obtained from your mortgage lender could come from a number of factors.
Low credit score
One of the most influential factors of your mortgage rate is your credit score. The higher your credit score, the lower the interest rate on the mortgage. The best mortgage rates and terms go to borrowers with credit scores of 740 and higher; while they charge higher interest rates on sub-prime mortgages. They will ask you a higher interest rate in order to compensate for the higher loan default risk that they are taking.
A mortgage lender doesn’t have to give you the low advertised interest rate. This is called the representative APR and it has to be offered to only 51% of people applying for that specific product.
You need a longer lock period
You might also end up with a higher mortgage interest rate if you lock it for a long period of time. The lock period can range from 7 days to 90 days or even longer. The usual lock term is anywhere from 15-45 days, which is the average time needed to close a loan. In case you plan to close in a couple of months you will have to pay some extra fees that will end up increasing your mortgage rate.
The loan amount is big
Most mortgage lenders advertise conforming mortgage rates. These apply for loans that do not exceed $417,000. Conforming loans offer more competitive rates while jumbo lending features more stringent guidelines and as lenders are taking more risk they usually come with higher interest rates.
The LTV is high
The higher your Loan to Value Ratio (LTV) the higher your mortgage rate will be. The cost of risk in making a mortgage loan influences the interest rate. Lenders are trying to minimize the risk by offering the potential buyers a higher interest rate. All mortgages contain an implicit “risk based pricing”
which causes the rates to change.
The property is not going to be your primary residence
The type of property you’re purchasing influences your interest rate. When purchasing a second home, you might receive a higher interest rate due to the increased risk for the lender. Another possibility is to receive the same rates however there will be a larger fee for the investment property. In case you don’t want to pay that fee upfront it can be absorbed in the rate by paying a higher interest rate.
You are purchasing multiple units
Another reason your mortgage rate may tick higher is if the property has multiple units. Interest rates are fairly consistent with single-family loans; however if you want to purchase a multi-unit property as an investment, you will be restricted to a conventional mortgage with a high down payment as well as a higher interest rate.
You took a lender credit
If you are not a fan of closing cost you’ve got two options: You can either capitalize the cost by adding it to the loan amount, or you could pay a slightly higher interest rate and in return the lender credit will cover most or all of your closing costs.
Lender credits allows you to make trade-offs in how you pay for your mortgage and closing costs; they can lower your closing costs in exchange for a higher interest rate.
Just as some properties carry more risk than others, there are certain classes of borrowers that are safer to lend to than others. A mortgage lender will hit you for any exception they will have to make in order to get you the funds. You will also have to pay a higher interest rate if the lender has to manually underwrite the approval process.
Lender pays the Mortgage Insurance
Are you looking to buy a home but are reluctant as you haven't accumulated the required down payment to avoid paying a private mortgage insurance. If this is the case you do not have to pay mortgage the insurance out of the pocket, you can opt for a lender paid mortgage insurance. In this case, your mortgage lender will be the one paying your mortgage insurance and will pass on the cost to you in the form of a higher interest rate. You will still be the one paying the mortgage insurance but it will be via the interest rate as opposed to upfront or a separate payment.
As mortgage rates are currently pretty low you should talk to your mortgage broker as he/she might be able to get you a good deal despite your lower credit score or the high loan amount. Mortgage brokers may be able to find you the loan of your dreams as they check out offers from competing lenders.