Variables That Affect Interest Rates


If you’re like most Americans buying a home, whether it’s the first or the fifth, you most likely are applying for a mortgage. This can come from a bank, lending company, or can be financed by the owner. Most people who own a home are paying a mortgage. The most common mortgages are either on a fifteen year note or a thirty year note, and with a mortgage, as with most loans, comes an interest rate.   Statistics show that over half of housing units owned by Americans are owner occupied, and the majority of these are still being paid on.

You definitely want to seek out the lowest interest rate on your loan, and there are a variety of factors that influence this. Interest rates tend to fluctuate from year to year, so it pays to know what factors to be aware of when shopping for the best loan.

The most influential factor on your interest rate is your credit score. The credit score is based on your credit report, which your lender will undoubtedly check before composing and approving a loan. Make sure your credit report is accurate and up to date before seeking a loan in order to ensure that you get the very best rate available to you.

The cost of the home and the amount you put down at closing will also influence the interest rate on the loan. The more you pay down initially, the lower your interest rate will generally be. In the United States, most homes require a twenty percent minimum down payment in order to buy. This is the common amount to pay at closing, although it can be approved for less. Most times, if you pay less, you’re also required to purchase personal mortgage insurance, referred to as PMI, in order to be approved.

The location of the home will also influence the interest rate. Most times, metropolitan areas have higher prices and interest rates than rural areas.

The loan term (length of time) will factor into the interest rate. As paying more money up front will typically lower the interest rate, so will shortening the length of the loan. The idea is the same- the lender has a faster return on their loan.

Finally, the loan type will dictate the terms of the loan and interest rate. Loans usually fall into five different categories- Traditional, VA, USDA, FHA, or owner financed. Depending on your personal situation and loan originator, these can vary significantly. Make sure to talk to multiple lenders before applying for your home loan, keep your credit clean, and get the best rate available.

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