2019 Idaho Real Estate Blog

Seven Key Factors That Affect Your Interest Rate Main Idaho Real Estate Insights

Getting a loan is a big deal and a lot goes into getting one. Getting a home loan is also rewarding!

Home Loan Interest Rates 101

One of the comments buyers talk about is interest rate and how they differ between home loan agents. One thing to keep in mind is that there are many interest rates available to a person at any time and if you are seeing different interest rates you need to determine what the loan being offered consists of. For example, anyone can get a better rate, if you are willing to pay for it and if it makes sense!

Price vs Loan Amount

Homebuyers can pay higher interest rates on loans that are particularly small or large. The amount you’ll need to
borrow for your mortgage loan is the home price plus closing costs minus your down payment. Depending on your
circumstances or mortgage loan type, your closing costs and mortgage insurance may be included in the amount of your
mortgage loan, too.

Your 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 stake in the property. So in years past if you were able to comfortably put 20 percent or more down, do it—you
were usually getting a lower interest rate. There are a few tricks of the trade and in recent years we are seeing the best
rate at about 85% LTV. Let’s talk more to see if this will work for you in your area.
If you cannot make a down payment of 20 percent or more, lenders will usually require you to purchase mortgage
insurance, sometimes known as private mortgage insurance (PMI). Mortgage insurance, which protects the lender in the
event a borrower stops paying their loan, adds to the overall cost of your monthly mortgage loan payment.
As you explore potential interest rates, you may find that you could be offered a slightly lower interest rate with a down
payment just under 20 percent, compared with one of 20 percent or higher. That’s because you’re paying mortgage
insurance—which lowers the risk for your lender.

It’s important to keep in mind the overall cost of a mortgage. The larger the down payment, the lower the overall cost
to borrow. Getting a lower interest rate can save you money over time. But even if you find you’ll get a slightly lower
interest rate with a down payment less than 20 percent, your total cost to borrow will likely be greater since you’ll need to
make the additional monthly  mortgage insurance payments. That’s why it’s important to look at your total cost to borrow,
rather than just the interest rate. Make sure you are factoring in all of the costs of your loan when you are shopping
around to avoid any costly surprises.

Your Credit Score(s)

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. Lenders use your credit scores to predict how
reliable you’ll be in paying your loan. Credit scores are calculated based on the information in your credit report, which
shows information about your credit history, including your loans, credit cards, and payment history.
Before you start mortgage shopping, your first step should be to check your credit, and review your credit reports for
errors. Talk to your lender right away – they are a fantastic resource and many have tools available to assist your for free
in determining your best route to clear credit items the fastest with the least expense.

The Length of the Time of the Loan

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. A lot depends on the specifics—exactly how much
lower the amount you’ll pay in interest and how much higher the monthly payments could be depends on the length of the
loans you're looking at as well as the interest rate.  

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.

The Location of the House

Many lenders offer slightly different interest rates depending on what state you live in.  For example, due to higher
home process the average rates in CA tend to be lower than in ID. On a national average the overall online posted rate
may be less than a particular state…especially a highly desirable area like Boise with a lot of competition.

Type of Loan

There are several broad categories of mortgage loans, such as conventional, FHA, USDA, and VA loans. Lenders decide which products to offer, and loan types have different eligibility requirements. Rates can be significantly different depending on what loan type you choose. Talking to multiple lenders can help you better understand all of the options available to you.

One more thing to consider: The trade-off between points and interest rates As you shop for a mortgage, you’ll see that lenders also offer different interest rates on loans with different “points.” Generally, points and lender credits let you make tradeoffs in how you pay for your mortgage and closing costs. Points, also known as discount points, lower your interest rate in exchange for an upfront fee. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice for someone who knows they will keep the loan for a long time.

Lender credits might lower your closing costs in exchange for a higher interest rate. You pay a higher interest rate and the lender gives you money to offset your closing costs. When you receive lender credits, you pay less upfront, but you pay more over time with the higher interest rate. Keep in mind that some lenders may also offer lender credits that are unconnected to the interest rate you pay—for example, a temporary offer, or to compensate for a problem.

There are three main choices you can make about points and lender credits:

  1. You can decide you don’t want to pay or receive points at all.
  2. You can pay points at closing to receive a lower interest rate.
  3. You can choose to have lender credits and use them to cover some of your closing costs but pay a higher rate.

Resources:

 
Posted by tlangford at 8/29/2019 12:44:00 AM
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Michelle Penick, Build Idaho Client Real Estate Services

Michelle Penick

Client Care Team
208.629.0217 | [email protected]

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