Variables that effect your mortgage rate

What does it mean to get a good interest rate?

Unfortunately there is no simple answer. Because every borrowers situation is unique and lenders have different criteria they use to judge your credit-worthiness. Then you throw in the timing variable and you can see it can be difficult to understand whether you are getting a good interest rate.

Lets look at the variables

You don't need degree in finance to get a good rate, but you should understand basic principals the lenders use to originate a mortgage.

Your loan amount effects your rate

The amount of your loan can increase your interest rate if the amount financed exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. The conforming loan limit changes at the beginning of each year.

Length of your loan

Shorter loans, such as 20 year or 15 year note, can save you thousand of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower interest rate than a fixed rate mortgage, but your payments could get higher when the interest rate changes.

Down payment

A larger down payment (greater than 20 percent) will give you the best possible rate. Down payments of 5 percent or less should expect to pay a higher rate as you are starting with less equity as collateral. If you have got the cash now and want to lower your payments, you can pay on your loan to lower your mortgage rate. It is a simple concept, really, In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrowers payments. Closing costs are fees paid by the lender, if you do not want to pay all of the closing costs, expect a higher rate, which will pay the lender additional interest over the life of the loan.

Credit score is very important

Credit quality and debt-to-income-ratio affect the terms of your loan through FICO Score. If you have good credit and your monthly income far surpasses your monthly debt obligations, you will get approved at a lower interest rate. However, if your monthly income barely covers your minimum debt obligations, even if you have a credit report, you will not receive the lowest available interest rate.