In today’s volatile credit market, it can be easy to get lured into a rate quote that sounds too good to be true. After giving your lender limited information, he or she may quote you a low rate just to lure you into doing business with them. If you did not complete a full loan application to obtain that rate, that rate means nothing! No matter what your mortgage professional tells you, there are several factors that can actually increase your rate and more often than not, you will probably close on that higher interest rate. By knowing the top 10 factors that can affect your rate, you’ll be better prepared in deciding whether the quote you were given is the right one for you.
1. CREDIT SCORE
The most obvious factor that affects your interest rate is your credit score. Lenders will pull your credit report, called a Tri-Merge Credit Report, which will give them three scores from each of the top 3 leading credit bureaus: Experian, Equifax, and TransUnion. Of the three scores, the one that falls in the middle will be the one that the lender will use to factor in what rate to quote you. Generally, credit scores above 720 will give you the most favorable interest rates. Anything lower than 720 may increase your rate, and ultimately your financing costs. If you’re not in a hurry to get a mortgage, take some time to actively improve your credit score. Increasing your score by just a few points could help you save tens of thousands of dollars, if not hundreds of thousands.
2. LOAN DOCUMENTATION
If you are applying for a loan that requires full documentation, your rate will be less than if you were submitting only limited or no documentation. No documentation loans are particularly popular with self-employed borrowers or those who have incomes that are hard to verify.
3. THE TERM
The longer the term of the loan, the lower the monthly payment, but also the higher the interest rate. For example, let’s compare a 15 year fixed mortgage versus a 30 fixed year mortgage of $100,000. The 15 year mortgage is at 6.5% and the 30 year is at 7%. The monthly payment on the 15 year is $871.11. However, the 30 year mortgage is only $665.30 per month. This is why you should never just look at the interest rate to determine whether you should go with a loan. Even though the 30 year fixed loan has a higher interest rate, the monthly payment is much lower than the 15 year fixed that has a lower interest rate.
4. DOWN PAYMENT
Putting down less than 10 percent can cause your rate to increase dramatically. Nowadays, especially in declining markets, finding a loan that allows you to put less than 15% may be few and far in between. If you know you will be buying a house sometime in the future, start saving as much as you can. There are also government programs that can help homeowners obtain down payment assistance.
5. ORIGINATION FEE
Whether or not you pay an origination fee can also affect your interest rate. If you plan on keeping your home for less than 5 years, it may be better for you to negotiate a 0% origination fee and pay a slightly higher rate. Otherwise, you might be better off paying the 1 or 2 points in origination fees so that you can save thousands of dollars by having a lower interest rate.
6. ADJUSTABLE RATE VS. FIXED
Fixed rate mortgages will normally have a higher rate than that of an adjustable rate mortgage (ARM). Be extremely careful when you’re considering which type of loan would work best for you. Adjustable rates tend to be really low at first, but they will increase at a future date. So be cognizant when a lender quotes you a terrific rate for an ARM – it will only be good for a certain period of time and it’s up to YOU to determine whether you can afford the payment when the rate adjusts. The rate may adjust as early as 6 months, 1 year, 3 years, 5 years or even 10 years. Plan ahead!!
7. LOCK QUOTE
Many lenders will quote you a rate that if locked, is only good for 15 days. The average real estate deal, however, usually does not close for 30-40 days. When your lender tells you that the rate quoted you is locked, make sure it’s in writing and that you know exactly when that rate expires.
8. PRINCIPLE VS. INTEREST ONLY LOANS
Interest only loans are popular, particularly with higher loan amounts, because the monthly payments are lower. The rate, however, tends to be higher than a loan where you’re paying both principle and interest. Again, this is another situation where paying a lower interest rate may not be in your best interest.
9. CLOSING COSTS
If you’re short on cash, you may negotiate to pay less out of pocket at closing by agreeing to a slightly higher interest rate. Many borrowers, particularly first time home buyers, find this very useful.
10. DAY OF THE WEEK QUOTED
Believe it or not, the day of the week that you were given the quote affects your interest rate. If you’re shopping around, make sure you obtain all your quotes on the same day. This way, you’re comparing apples to apples.