The Lowdown on Loans – What Determines Your Mortgage Rate?
If understanding mortgage loans and interest rates is confusing and frustrating for you, you’re not alone! Many homebuyers experience this and our team is here to help as much as possible.
A lender looks at several factors to determine an interest rate based on YOUR specific financial situation including your credit score, your down payment amount, your loan amount, and even the type of home you purchase.
The bottom line is -- every loan scenario is unique, which means you might get a different interest rate than the person next to you (and from the one you saw advertised).
Interest Rates Are Tailored to You (it’s not One-Size-Fits-all)
Here are 4 important points to be aware of before you go shopping for a loan:
Rates vary depending on the market and several borrower-specific factors. That’s what makes it complicated.
There are a lot of different banks, credit unions and lenders that offer entirely different type of loans and corresponding interest rates.
The rates you see advertised are usually meant for someone with excellent credit, applying for an owner-occupied single-family home loan, with a big down-payment.
Your scenario is unique, so it’s good to know about all the factors lenders are interested in when you apply for a loan.
Loan Purpose
The two purposes for a mortgage loan:
A purchase money mortgage applies to the purchase of a principal residence, second home or investment property.
A refinancing loan is when you want to obtain new financing for an existing loan. You will likely get a lower rate for a purchase money mortgage than a refinance.
Loan Amount
Your rate will be different depending on the size of your mortgage. You will likely get a lower interest rate when your loan amount is under $726,200 as that is the limit for a “Conventional Loan” in the Pensacola Bay Area. Anything above that loan amount is considered a “Jumbo Loan”.
When you hear things like “Jumbo Loans” and “Conventional Loan” limits, these are the loan amounts for our area that they are talking about and these different amounts affect your interest rate.
Credit Score
This one is pretty simple: the higher your credit score, the lower your rate.
This is the single most important factor to determining your mortgage rate. However, your score is not the only thing that matters; what it says on your credit report matters too.
Loan-to-Value Ratio
The loan-to-value ratio is the loan amount as a percentage of the total appraised value of the property. The higher the loan-to-value percentage, the higher your mortgage rate will be.
Property Type
If you’re purchasing a single-family home that will be your primary residence, the mortgage fees will be slightly lower than if you were to purchase a condo. This is because a condo is part of a larger complex, so if other owners in the complex miss a payment or there are a lot vacant condos, your condo may potentially lose value.
Occupancy Type
There are three types of occupancy: owner-occupied, second home or investment property.
A second home will have slightly higher mortgage rates and an investment property may be even higher. This is simply because there’s less of a chance that a homeowner will walk away and miss payments on their own residence.
Debt-to-Income Ratio
This is how a bank determines how much home you can afford.
It is your monthly liabilities divided by your monthly income. This gives them a percentage. The lower the percentage, the lower your mortgage rate.
First Steps to Take
This is all about risk. Lenders base the interest rate they give you on how much risk they’re undertaking by loaning to you. That is why our team will always give you as much information as possible about the process and how to prepare your finances.
We recommend that you shop around for your mortgage rate. Different lenders will offer different loans and rates, so the more you know, the better your rate will be. The Mark Lee Team has great lender partners that we can connect you with.
All of this can feel overwhelming and complicated, but don’t worry – you’re not alone!
No matter what your loan scenario is, our team can help. We are here to answer all your questions and lead you step-by-step to your best deal.