There are multiple factors that ultimately determine what the interest rate on your home loan is going to be. You need to be aware of these factors so you can set your expectations accordingly and get the best possible deal on your future loans. When lenders are deciding what kind of rate to give each applicant, they look at very specific criteria. There are some things that you probably don’t even know affect the rate you get when borrowing money.
Your Credit Score
One of the biggest factors that affect the interest rates on home loans is the applicant’s credit score. If you have a fairly high score, you will probably be given a fairly low rate. If your credit is bad, you’ll have a hard time getting a good overall deal. You should try to improve your credit as much as possible before applying for a home loan. This will help boost your chances of approval and of saving money.
Location of the House
Even the location of the house you want to buy can factor into the interest rate your lender gives you. There are online tools that you can use to find out what interest rates on home loans are like in your particular area. You can use these tools to get a better idea of what to expect when applying for this sort of loan.
Total Loan Amount
You also have to consider the total amount that you need to borrow, as it will affect the rate you get. This includes all of the closing costs and other fees that come with buying a home. The larger the loan amount, the more interest you are going to pay overall. Take the time to calculate the cost of your loan.
Your Down Payment
The larger your down payment is, the lower your interest rate will be. This is precisely why it is such a good idea to put down at least 20%. A smaller down payment will significantly raise your rate and therefore how much you spend on your loan as a whole. If you do not currently have enough to put down twenty percent, you should save up. It is better to put off buying a home for a little bit if it means saving hundreds or even thousands of dollars on your mortgage. You should never take advantage 0% down home loans, as they always come with ridiculously high rates. This can make paying back your loan on time nearly impossible.
The length of your loan’s term can also impact the interest rate you get. A shorter term means a lower rate, which will save you money. Many first time home buyers opt for a longer period because it gives them more time to pay back the money, but it’s usually a mistake. You want to go with the option that will save you the most in the long term. You should always try to negotiate the shortest possible term with your lender.
Type of Interest Rate
A fixed interest rate does not change at any point while the loan is active, but a variable rate can fluctuate over time. Lots of people decide to go with a fixed rate because it seems like the safest bet, but it might not save you the most money. Variable rates can go down and help you save some money on your loan. While they are somewhat of a risk, it can end up paying off for you depending on how things go.
Sometimes a borrower will give a lender a guarantee that the debt will be paid on time one way or another. This usually comes in the form of a guarantor or co-signer. One of the reasons to consider this option is that it can reduce your interest rate by quite a bit. A lot of lenders are more than willing to reduce a borrower’s interest rate if it means getting this sort of guarantee. Just make certain that you find the right person to co-sign your loan or serve as a guarantor. It should be someone with whom you are close and trust completely.
All of these factors are very important to consider when you are getting a home loan. They will help to inform you of what kind of rate you can expect to get. It is still important to get quotes from lenders though. All of this information is going to put you in a much better place to get the best deal on a new mortgage. If you are in the market to buy a house, you’ll have to remember these things. It can seem impossible to get a fair rate, but it’s actually quite simple when you what you need to do.