Before you buy a house, you will likely shop around for a mortgage and compare interest rates. The interest rate is crucial as it affects how much you will pay over the life of the loan. Even a small change in your interest rate can save you tens of thousands of dollars over a 15- or 30-year loan. But what affects your mortgage interest rate?
Your Credit Score
Your credit score is one of the biggest factors affecting your interest rate. Expect a lower interest rate if you have a high credit score and vice versa.
Lenders see your credit score as an indication of how likely you are to pay your loan fully and on time.
The Home Location
The home’s location will also make a difference, as there are regional differences in interest rates. They can vary by state as well as county and even if it is in a rural or urban area.
The Loan Term
The length of the loan is also very important. Going with a shorter loan term will give you higher monthly payments. In exchange, you get a lower interest rate and pay less overall.
The Amount You Need to Borrow
There are two parts to the amount you need to borrow:
- The cost of the home.
- The size of your down payment.
The lower the overall loan amount, the better your interest rate is likely to be.
Your Down Payment
In addition to affecting the amount you need to borrow, your down payment can directly affect your loan percent. Most lenders will give you a better rate if the down payment is at least 20 percent.
Type of Loan
Your loan type will also affect the interest rate. Remember that there are USDA, VA, conventional, and FHA loans.
Fixed vs. Adjustable
Whether the interest rate is fixed or adjustable can also have an impact. In this case, it is more likely for the adjustable rate to be lower than the fixed at some point. At other times, however, it will be higher.