One of the most common conversations we have with clients is why their mortgage rate is different from the rates they see advertised on TV. Mortgage rates are affected by several things which is why you probably have a different loan rate than your friends and family. The mortgage rates you see advertised on TV are rates for what lenders consider a perfect loan scenario. Most advertised rates apply to less than 5% of California mortgage loans.
In this article, we share the top 5 factors that affect the interest rate on your mortgage loan.
The 1st factor is beyond your control or your lender’s control. Factors 2-5 are considered varying levels of risk to lenders. Your mortgage interest rate is calculated in part on where you rank on these 5 factors.
First, General Market Rates. The baseline mortgage rates are based on current interest rates set by our financial markets. These rates fluctuate based on general economic health, inflation, the jobless rate, imports, exports, etc…
Second, Credit Scores. The lower your credit score is, the higher your mortgage loan rate. This is because lenders consider lower credit score borrowers more risky than a borrower with high credit scores.
Third, Debt vs Income. If you earn a good income but you also owe a lot of money to personal loans, credit cards, auto loans or other obligations your mortgage interest rate will be higher than someone who does not have a lot of monthly debt payments. Lenders refer to this as your Debt to Income Ratio (DTI).
Fourth, Loan to Value. If your home is worth $500,000 and your mortgage loan is $400,000 then your Loan to Value (LTV) is 80%. Someone with a 70% LTV will get a lower mortgage interest rate than someone with 80% LTV. This is why when home values are high many homeowners will refinance their home. The higher loan value gives them more borrowing power as well as a more attractive interest rate.
Fifth, Loan Size. Every county in the U.S. has a loan limit established by Federal Guidelines. You can still borrow more money than this loan limit. However, if your mortgage loan is equal to or less than this limit, you will get a lower mortgage interest rate. These county limits change but your mortgage lender can tell you what the current limit is for your county.
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