Factors that affect mortgage interest rates

Factors that affect mortgage interest rates


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If you want to buy a property but don’t have the capital to pay for it with cash, the next option is to take out a mortgage loan. By taking on a mortgage to buy the property, you would have to pay a staggering amount of interest throughout the term of the loan. However, what most people don’t know is that there are some factors that can affect (either reduce or increase) their mortgage interest rate. By following these steps, you can cut down the cost you have to pay and therefore save for other things. Without further ado, let’s discuss some of the factors that can affect your mortgage interest rate.

Location of the property

The location of your property is one of the main factors that affect your mortgage interest rate. The interest rates offered by your lender depends on the location of the building you want to buy. For example, the interest rate offer on houses in the rural area will surely be different from those offered to those located in the urban area. So before you apply for a mortgage, ask the lender to explain the different choices available so that you will be able to pick the most suitable location.

Your Credit Score

Credit scores are calculated based on many factors on your credit report. These include outstanding loans, (on-time) payment history, average age of credit lines and credit card utilization. The credit score is one of the most important factors that affect your interest rate. The higher your credit score, the lower the interest rate offered by the lender; inversely, the lower your credit score is the higher the rate offered by the lender. Therefore, you should review your credit report for errors before you start any mortgage shopping. This will prevent you from getting a low score that can keep you from qualifying for a loan.

The size of your Down Payment

The size of down payment is another factor most lenders use in calculating your interest rate when you apply for a mortgage. The larger your down payment the lower your interest rate will be, while the lower it is the higher your interest rate will be. This would help lenders reduce the risk involved because if you were unable to continue the payment the lender would be at great risk. But when you make a larger down payment, it would result in a lower loan-to-value (LVT) ratio and this will, however, reduce the risk level for the lender. By this, the lender will have nothing to worry about and will, therefore, reduce the interest rate involved.

The term of the loan

Since lending involves great risk, lenders are very cautious of the term of the loan and work to ensure that the loan is less risky. One of the factors that most lenders use in calculating interest rate is the term of the loan. The longer the term of the loan the higher the interest rate while the shorter the term, the lower the interest rate. To get a lower mortgage rate, you should shorten the term of your loan because the shorter your loan term the lower your mortgage rate.

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