Welcome back to the second half of our two-part article on everything that can and will affect your mortgage interest rate. This is an incredibly important number that will make a huge difference in the final cost (over 15-30 years) of buying a house. Last time, we talked about the national and local factors that will determine how much a bank can offer as an interest rate, including what is necessary for the bank to generate necessary income.
Join us again today as we pick up where we left off. This time, talking about the factors in your own life that influence a mortgage interest rate. And how you can improve your prospects.
What Affects Your Personal Mortgage Rate
If you're currently shopping for a mortgage, understanding what can affect your interest rate is one of the most critical steps to getting a good deal. By grasping not only what a bank cares about, but also why they care, you can mold your lifestyle and finances into the right shape to give banks confidence in your ability to pay and, therefore, win a better interest rate than perhaps even the current market can account for.
Here's what matters and how to make it work for you:
Your Credit Score
First and foremost is your reputation as a borrower and debt-holder. The bank looks at your credit history for the same reason a landlord looks at your rental history: They want to make sure you have a solid record of paying back debts. If you have a history of paying all your debts reliably and on the prescribed payment schedule, banks have a much greater confidence that you will continue in this way and pay your mortgage as well.
The relationship to mortgage interest rate is direct. When your credit score is good, interest goes down. Credit score is high, interest goes up.
But even if your credit score was wrecked by past mistakes or uncontrollable debt (medical, for example), you can still heal your credit score. Just start building a strong record of being responsible with debt now. Take out small loans and repay them quickly. Use a credit card for monthly expenses, then pay it off in full on time every month. This will build a history of good debt management and, eventually, your credit score will recover.
Total vs Down Payment Amount
Another important calculation is the total size of your loan versus the size of your down payment. The down payment is a near-magical mechanic of mortgages that provides a unique type of calculation for banks: Can you save money? The bigger a down payment you have, the more you have effectively proven that you have the self-control and money management skills to hold back a portion of your income (like you will need to do to pay the mortgage) and not spend it against all temptation.
This tells them that you will also have the self-control to be responsible with mortgage payments in the future. And like a good credit score, it assures a bank that they can actually afford to give you a low mortgage interest rate. Therefore, the higher percentage of the mortgage you can pay up front, the lower an interest rate you are likely to see.
While international banks to back their own branches, each branch of a bank is expected to remain independently solvent. What this means is that local economic factors can also influence what kind of interest rate you get from one bank to another. The same lender offering a mortgage in one state is likely to calculate a different interest rate from a bank in a different state.
Therefore, the location where you want to buy (and therefore the bank branch you work with) can influence your interest rate. But it's not always clear in which direction or how to manipulate this factor. Simply be aware that a home in another region might get a different interest rate.
Length of Mortgage
The duration of your mortgage term also matters a great deal. After all, interest isn't based on the total amount of the loan, exactly. It's based on the number of years it takes you to pay. This means that a 30-year mortgage will make twice the income for the bank as a 15-year if the interest rates and loan amounts are otherwise the same.
On the other hand, banks have to wait 30 years to get their full interest amount. Which also doubles the chance that someone will default or possibly buy out their mortgage. As it turns out, shorter mortgage terms are generally more likely to get a low interest rate than long mortgages because banks see a more reliable payment in the near future.
Type of Mortgage
Finally, your interest rate will also understandably be influenced by the type of mortgage you choose. This article has mostly spoken in terms of fixed-rate mortgages. However, you may also choose to consider an 'adjustable' interest rate. These usually offer a fixed rate for a certain number of years, then allows the bank to adjust your rate based on the current market. Adjustable rates are not generally considered in the best interest of the home buyer, but some have found success with this route.
If you are currently trying to determine your best possible mortgage interest rate, understanding the influencing factors is an important first step. Start by understanding the national mortgage rate, then how local factors may be influencing local bank rates. Finally, take a look at your own financial situation and how you can improve so that banks will have more confidence in your ability to stay committed to payments. For more insights into getting the best mortgage you possibly can, contact us today! Our team is ready to guide you through the mortgage process.