5 Key Factors for The Best Interest Rate
With Interest rates overwhelming the mortgage market, now is as good of a time as ever to know what goes into getting a low interest rate.
Become an expert and get familiar with these 5 factors and you will position yourself for a low interest rate regardless of market conditions!
- Credit – Your credit score is one of the most significant factors affecting your interest rate. A higher credit score typically qualifies you for a lower interest rate, as it indicates to lenders that you are less risky.
- Property Type – Most lenders deem different property types as more or less risky than others. For example, a condominium or a manufactured home will likely lead to a higher interest rate as compared to a single-family home even with the same borrower profile. This is because a mortgage is an asset-backed loan.
- Down Payment / LTV (Loan to Value) – The loan-to-value ratio (LTV) is the amount of the loan compared to the value of the property. A lower LTV ratio (meaning you have a larger down payment) can result in a lower interest rate, as it represents less risk for the lender.
- Loan Type / Term – The type of loan you choose can affect your interest rate. For example, fixed-rate mortgages typically have higher interest rates than adjustable-rate mortgages (ARMs) initially, but the rate on an Adjustable-Rate Mortgage can adjust over time based on market conditions. The overall term of the loan can also affect the interest rate with shorter loan terms having lower interest rates. A 30-year and 15-year term are your most popular options.
- DTI (debt to income) – Your debt-to-income ratio is the percentage of your gross monthly income that goes toward paying debts. A lower DTI ratio typically results in a lower interest rate and can also allow you to access more loan types.
BONUS TIP – If you have some extra cash on hand, you can buy down the interest rate with discount points with one point equal to 1% of the loan balance. Depending on the recuperation period, this can be an effective way to lower your monthly payment and save money overall. Alternatively, if you can secure seller concessions, these can be used for a temporary rate buy down that can lower your rate for the first few years of the mortgage.
For the best advice on getting yourself the lowest interest rate possible, you should inquire with a local mortgage company or loan officer early in the home shopping process. This will give you the time necessary to make any adjustments to improve your chances of getting a good interest rate and making your monthly payment as low as possible.