Mortgage Interest Rates
There are several factors that can determine your mortgage interest rate. Each of which can carry a different weight when your interest rate is determined.
Below is a list of mortgage interest rate determining factors:
Combined Loan-to-Value (CLTV) ratio: is the percentage of the total loan amount divided by the value of the property. For example, if you have the first mortgage amount for 80% of the property value and the second mortgage amount for 15% of the property value, your CLTV will be 95%. Borrowers with lower CLTV ratio will find the loans with lower interest rates.
Escrows: The property taxes and home owners insurance can be paid one of two ways. Either you can pay them your self when they are due or you can have your lender collect a monthly payment and your lender will pay them when they are due. If your lender collects a monthly amount this is called an Escrow. If you choose to waive the escrows and pay for the taxes and insurance yourself some lenders will consider this an additional risk and increase your interest rate by about 0.25%
Paying Points upfront can lower your mortgage interest rate. Your Loan Officer should help you determine if paying points will save you money based on your future plans.
Debt to Income Ratio: This is the amount of monthly obligations you owe divided by your gross monthly income. This number is used to determine how capable you are of repaying your potential mortgage.
Past 12 Month Mortgage History: One of the single most important fact when determining one's mortgage interest rate is their mortgage, or rental, history. Many lenders will look back 24 months to see how your housing payment history has been. Some lenders will only look back 12 months and others may look back even further. Obviously, someone who has a a number of late payments or slow payments on their mortgage or rent is going to present a higher risk to a lender than someone who continually pays their housing payments on time.
Loan to Value (LTV): Is the amount of money you owe on your house or the amount you are trying to borrower versus how much your house is worth. When you loan to value is low, it is more favorable to the lender to give you the best rate possible because you have a lot of equity in your house and will be less prone to foreclosure in the lender eyes. When your LTV is high then you will get a higher rate.
Bankruptcy or Foreclosure: If you have experienced either of these events then the amount of time that has passed since the BK or FC will have an affect on your mortgage interest rate. The more recent the BK or FC took place the higher an interest rate you will be offered.
Income Documentation: The way in which you document your income with affect your interest rate. Lower documentation loans will cause a higher rate than that of a traditional full income documented loan.
Asset Verification: Generally, you will qualify for a lower mortgage rate if you can verify that you have liquid
assets to cover 3-6 months of mortgage payments (principle, interest taxes & insurance).
A stated income loan is a great loan for people who are W-2ed or self-employed. There are also programs that allow stated income and stated assets on the same loan. These programs help to preserve a borrower’s credit by getting them the funds that need when they need them.
Down payment: The amount you are willing to put down on the purchase of your home is a large determining factor in the interest rate you will receive. Although 100% financing may be available to you (depending on your credit score), you will have a lower interest rate if you are able to make a down payment of at least 5% of the purchase price.
Credit score: Your credit score will determine whether or not you will fit into conforming loan programs with the lower interest rates or into sub prime or ALT-A programs with higher interest rates.
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Information listed above is to be used for educational purposes only and is not guaranteed