How To Get The Best Interest Rate For A Home Loan
If you’re like most people, you want to get the lowest interest rate that you can find for your mortgage loan. But how is your interest rate determined? Knowing what factors determine your mortgage interest rate can give you confidence preparing for the home buying process and for negotiating your mortgage loan.
Here are seven key factors that affect your interest rate:
1. Credit scores
Your credit score is one factor that can affect your interest rate. In general, consumers with higher credit scores receive lower interest rates than consumers with lower credit scores.
2. Home location
Many lenders offer slightly different interest rates depending on what state you live in.
3. Home price and loan amount
Homebuyers can pay higher interest rates on loans that are particularly small or large. If your loan amount is high enough you might find yourself needing a Jumbo loan. Fannie Mae and Freddie Mac are restricted by law to purchase single-family mortgages with origination balances below a specific amount, known as the “conforming loan limit.” The national conforming loan limit in 2019 is $484,350 for mortgages that finance single family one unit properties. Loans above this limit are known as Jumbo loans.
4. Down payment
In general, a larger down payment means a lower interest rate, because lenders see a lower level of risk when you have more of an investment in the property.
5. Loan term
The term, or duration, of your loan is how long you have to repay the loan. In general, shorter term loans have lower interest rates and lower overall costs, but higher monthly payments.
6. Interest rate type
Interest rates come in two basic types: fixed and adjustable. Fixed interest rates don’t change over time. Adjustable rates may have an initial fixed period, after which they go up or down each period based on the market. Your initial interest rate may be lower with an adjustable-rate loan than with a fixed rate loan, but that rate might increase significantly later on.
7. Loan type
There are several broad categories of mortgage loans, such as conventional, FHA, USDA, and VA loans. Rates can be significantly different depending on what loan type you choose.
Understanding how your mortgage interest rate is determined will help you be more informed as you shop for a mortgage. Armed with information, you can have confident conversations with lenders, ask questions, and understand your loan choices.
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