Factors That Affect Your Interest Rate

Numerous factors come into play when determining the interest rate you’ll pay on a home loan.

Downpayment

The higher the percentage of the purchase price that you can afford to make as a down payment, the lower the interest rate you’re looking at. Paying 15% or 20% down can save you thousands of dollars over the life of the loan over paying 10% down. Pay a little more now or a lot more later – the choice is yours.

Closing Costs

Along those same lines, the more of your closing costs you’re willing to pay for, the lower the interest rate you’re given. The lender must pay numerous fees to close a loan, and the less of these fees you’re willing to pay instead of them, the more they’re going to demand of you in interest.

Loan Term

The monthly payments on a shorter term loan are generally higher than those of longer term loans, however one of the best ways to save money overall on the costs of buying a home is to strive for as short a loan term as possible. If you can afford the higher monthly payments on a 20-year loan, for example, you’ll save thousands of dollars in interest in the long run over the same loan with a 30-year term.

Your Personal Qualifications

Your credit rating and income level are enormous factors considered in determining the interest rate offered to you on a home loan. The more you can prove that you earn and the better your credit (and higher your credit score), the lower the interest rate you can get.

The Federal Government

Because of loan limits that have been established by Freddie Mac and Fannie Mae at each year’s start, your loan amount itself could affect your interest rate. If the loan amount you’re seeking exceeds the current conforming limits established on home loans this year, then your interest rate could increase.

Adjustable Rate Mortgages

Adjustable rate mortgages are particularly tricky loan products, as the initial rate will likely be less than the prevailing fixed rate, but once the initial fixed period is over, what you’ll pay on an adjustable rate shoots higher than the average fixed rate, and keeps on climbing.

Overview of Major Factors Affecting Your Interest Rate

As the following factors increase, your interest rate decreases:
* loan amount
* loan term (length of time you have to pay off the loan)
* lock-in period

As the following factors decrease, your interest rate increases:
* downpayment
* discount points
* closing costs
* quality of your credit (such as your credit score)
* personal income level