According to Investopedia the main factor that controls your interest rate is supply and demand. This is true in a lot of ways. If banks are overloaded with demands they will raise the interest rates so they can make more money. If consumers are not applying for home loans the banks and lending institutions will drop the interest rates to get more people to apply for them. It is a huge circle that goes around and around, decade after decade.
This is not the only thing that can affect your mortgage. There are many different factors involved when a loan is taken out for the property, or a home.
- Credit Score-Your credit score is a huge deciding factor for all lenders. The higher your score is, the lower your interest rates will be. Lenders each have a minimum required score that you must have to even apply. This barrier will be slightly different, depending on the loan that you are trying to get.
- Credit History-This is taken off the credit report breakdown. It shows how well you manage your bills, and your credit cards and loans. If you have a bar graph that is all over the place, if you qualify for a loan, the interest rates will be higher. If your line is consistent your loan will have a smaller interest rate.
- Employment-Where you are employed, if you are full or part-time, maybe even self-employed impacts your rates as well. Your income from your employment is factored into the loan equation. Self-employed people have a harder time getting a loan at all, especially with good rates, because it can be hard to show proof of a regular income.
- Loan Size-The size of the loan can cause your interest rates to increase. Most lenders have a number set for their loans and if you go over that amount the interest rates go up accordingly.
- LTV (Loan to Value)-The loan amount that you have applied for will be compared to the actual value of the property, or home, that you are trying to purchase. If the value is greater than the loan amount, the rates in the contract will go down. If the value is less, the rates on the loan will go up.
- Loan Type-The type of loan that you get will also play a role in your rate on your home loan. There are four basic types that you can get. You have the balloon payment that requires a lump sum at the end of a specified amount of time. A fixed loan allows you to lock in a set payment and rate of interest. The variable loan makes the rate of interest go up or down due to the market values. The adjustable-rate mortgage (ARM) also has a fluctuating rate of interest. The two that have rates that go up and down can be dangerous because the cost of them could go through the roof. It is best to pay these types off fast, while the rates are low.
- Term Length-The shorter the time is that you pay upon a loan, the lower your interest will be. Of course, with this type of loan, your monthly payment will be bigger. If you opt for a longer-term loan the payment will be smaller, but the interest will cost you more. This choice totally depends upon your income and how comfortable you are with it.
- Payment Frequency-Most loans are set up to make a payment once a month. Farmlands are an exception. They can choose to make a payment semi-annually or yearly. When this is done the payments are much larger, and so are the interest rates. The more often you make payments, the lower the rates will be.
- Property Type-The rates charged to you from the lenders can also be based on the type of property that you are trying to get the loan for. A residential house will be cheaper than farmland, and they both will be cheaper than commercial property. Even if you are buying a home to live in, if the lot is zoned for the commercial property you will end up paying a higher interest amount than you would expect.
- Co-Borrower-If you have a co-signer for the loan, they will also be judged on everything that you are. If your partner has great credit and income, you will have a way better interest rate.
- Debt Ratio-Your income compared to your payments going out is what is your debt ratio. Lenders like you to be at around 42%. This shows that you have more money than you need to pay your bills, which makes you a good risk for a loan.
- Documentation-If you can show documentation for all the information you have turned in your rates could be lower. Proof of what you say is important in the world of banking. What they can see on paper is what they go by for the loan and the interest that is tacked on to it.
The top 12 factors that will affect your loan are listed above. There are other things that they can look at as well. Every lender will have a slightly different process and will expect some type of additional information. Just be prepared, have documentation for everything, and keep your credit score up. The better you look on paper, the lower your interest rates will be.