Most people want the lowest possible interest rate they can find for their mortgage loan. This blog is written to help our clients understand how rates are derived, as well as understand what they can do to improve their chances of receiving a lower interest rate.
How are rates determined?
Besides daily movements in the rate market, there are many factors that influence interest rates. Credit scores, loan size, down payment, home location, loan type, and at least 14 other factors influence and determine interest rates. Here are the top four components that influence interest rates with an explanation of each variable
1. Credit score
Your credit score is a the number one factor that influences your interest rate. Your credit score is a reflection of your past credit history and helps lenders determine how reliable you’ll be in paying off a home loan. The credit score comes from a report that reflects your past credit card payment, student loan, car payment, home payment, and medical payment history. It may also reflect tax and child support debts.
Tip – Preapprove Early! During the preapproval period, we check your credit scores. Checking early allows for time to fix any errors or mistakes that may negatively impact your scores. A few point difference may save you thousands over the life of your loan.
2. Home location
Location matters. Rates are different from state to state. They also differ from county to county within the state. Different areas allow for different loan limits and loan types. Orange County has loans available requiring only 3.5% down to $625,500 while neighboring Riverside County limits these loans to $417,000.
Tip- Talk with us early about the locations that interest you. We can recommend the best loan programs, or help you decide if you should look in different surrounding areas that might be better suited to your situation.
3. Loan amount
Typically, you will pay a higher interest rate on a larger loan amount. Jumbo loans usually have a higher interest rate than smaller, conventional loans. Additionally, small loan amounts also have higher interest rates. We can advise you on the loan size that will minimize your rate.
4. Down payment
In general, the larger the down payment, the lower the interest rate. The more risk the bank takes, the higher the interest rate they will charge to borrow funds. The best rates are usually reserved for down payments of 25% or more.
Our goal is to put all of our clients into the best loan possible. After determining the loan type that best fits our client, we shop the lenders we work with to make sure that our clients receive the best rate for their unique situation. We also use software which helps us navigate intra-day rate changes, often saving our clients thousands of dollars. Let us put our 16+ years of experience to work for you!