When it comes to financing and purchasing property, knowledge is power! This article will delve into the main factor that determines your Mortgage Rate: your interest rate. The interest rate can make all the difference when it comes to the size of your mortgage, and the duration of your term.
There are so many factors that affect your interest rate that it can be overwhelming, but the more information you know about the variety of factors that affect your interest rate, the easier it is to make informed, empowered decisions that benefit you, your budget, and your lifestyle. Let’s take a look at the most important factors when it comes to your interest rate and consequently, your mortgage rate.
Your credit score is the most important factor for creditors when they are determining your interest rate. If your score is too bad, you might not qualify at all, or it might severely limit how much you are able to borrow. At least one of the borrowers must have a minimum credit score of 680. A higher credit score shows lenders that you are a less risky investment and more reliable. The less risky the investment is considered to be, the lower the interest rate that is offered.
Your income level doesn’t directly affect your interest rate. However, it will likely affect how large of a down payment you are able to put towards the purchase, which does have an impact on the interest rate. It is also related to your purchasing power, and the larger the loan, the greater total amount of interest you will be paying.
Loan to Value aka LTV Ratio
The Loan to Value ratio describes the percentage of the overall home value that is currently being borrowed. Factored into the LTV are the sales price, appraised value of the property, and the amount of the down payment. The larger the down payment is, the lower your LTV will be. A lower LTV is more appealing to lenders and can result in a lower rate. So, if you put a 20% down payment of $50,000 on a home worth $250,000, then your loan of $200,000 is therefore 80% of the value of the home. This means the LTV is also 80%.
The size of your down payment can affect whether or not you require insurance on your mortgage. When your down payment is less than 20%, most lenders will require that you have insurance on the property. Your borrowing power and interest rates can be affected by who the insurer is.
If you are buying property in an area with a very active market and a lot of competition, your interest rate is likely to be lower because there are so many lenders in the area. In slower markets, there is less competition so many lenders will raise their rates.
Many lenders will offer to “hold” the interest rate they offered you for up to 120 days. This guarantee protects you from any potential rate increases while you are shopping for your home. You are still able to take advantage of any decreases that might happen during that same period of time. A mortgage broker can help you to negotiate such a hold with a lender.
Refinancing is when you restructure your current mortgage. This usually happens when the term is up. Often this involves changing your rate from fixed to variable, accessing your built up equity, or consolidating debt. The interest rate you are offered can potentially be affected by any change to your mortgage. A mortgage broker can help you evaluate all your options prior to making any decisions regarding this.
Different types of homes actually have different risks associated with them, whether this is a detached home, mobile home, condo, etc. As such, your interest rate may be higher if a lender assesses your home type to be in a “higher risk” category.
When you are purchasing a secondary property such as an income property or vacation home, lenders sometimes view these as being a higher risk property than a principal residence. Again, higher risk usually equates to a higher interest rate.
Every single case is unique when it comes to the factors that affect your mortgage rate, and there are so many different factors that can affect your mortgage rate that it can be overwhelming. Visiting a trusted mortgage advisor can help you to better understand your exact situation, so that you can feel empowered when purchasing property and optimise your decision making process. Having someone knowledgeable in your corner can make all the difference when it comes to your home buying experience.