12 Factors That Drive Interest Rates!!!

There are well over 100 different mortgage products on the market today. There are hundreds of different mortgage companies who offer slightly different versions of each of those products. And each of those products has a range of interest rates that could be offered on any given day.

#1 FACTOR IS YOUR CREDIT SCORES. Your credit history is collected by 3 different credit bureaus. When you make application for a home loan, the lender will get a credit score from each of the three credit bureaus. Most lenders use the median (numeric middle of the 3) as the score with which they will underwrite your loan. The higher your credit score, the better your credit grade. Most of the mortgage products on the market usually have a higher rate for lower scores and a lower rate for higher scores.

#2 FACTOR IS YOUR LOAN-TO-VALUE (LTV) or “are you putting any money into the transaction for down payment?” Most traditional loan products that offer the most aggressive rates require at least put 5% down. When you get a mortgage that requires a lesser down payment, your rate will be about a .25% to .375% higher.

#3 FACTOR IS YOUR DEBT-TO-INCOME (DTI) RATIO. Traditional underwriting guidelines require very specific documentation to prove your income. And that income must be enough so that your DTI is somewhere between 40% and 50% or of your gross monthly income, no more than 40% to 50% can go to your new housing payment and all your other monthly debts. However, many borrowers today don’t meet this guideline for various reasons. They may choose a mortgage that requires little to no income and/or asset documentation which can add .25% to .50% more to the interest rate you get.

#4 FACTOR IS THE ESCROW ACCOUNT. Traditional mortgages require that the lender set-up and maintain an escrow account to save and pay for your home owner’s insurance and property taxes. However, many borrowers would rather manage those funds themselves. This might add slightly to the rate.

#5 FACTOR IS DISCOUNT POINTS. All rates can be adjusted depending on the desire to pay points and/or origination fees. Most consumers have a negative opinion about points because of misunderstanding what points are. Points are the only tax deductible closing cost and if you are going to be in the home for 3 to 5 years or longer it might make sense to pay at least one point.

#6 FACTOR IS HOW SOON YOU WILL BE CLOSING ON YOUR HOUSE. Interest rates are usually locked for 15, 30, or 60 days. The longer you lock-in period, the higher the interest rate will be. However, if you are building 60+ days out check the extended lock program that allows you to lock in with a protective capped rate – so if rates go up – you are protected. BUT if rate go down 30 days prior to your scheduled closing then you can lock in at the lower rate…..so it is a win-win…..

#7 FACTOR IS WHO IS PAYING YOUR CLOSING COSTS. Many borrowers have a limited amount of funds available to use in the purchase of their new home. What many do not consider is that the closing costs have to be paid in addition to the down payment. There are three options available to pay closing costs.
1.You can pay them yourself out of your pocket. This is the lowest rate option.
2.You can negotiate the seller to pay part or all of them for you. You will still get the lowest rate but the cost of the house will likely go up.
3.Your lender can pay them for you and build these cost into a higher interest rate.

#8 FACTOR IS THE TYPE OF PROGRAM YOU CHOOSE. The longer the term, the higher the rate (15 year, 30 year, 40 year, etc.). Fixed rates are higher rates than Adjustable Rate Mortgages (ARMs). The longer the ARM fixed period, the higher the rate (3/1 ARM, 5/1 ARM, 7/1 ARM, etc.) If you add an interest only options, your rate will be higher. And there are a number of other options that could add to the interest rate.

#9 FACTOR IS THE AMOUNT OF YOUR NEW LOAN: If you get a loan between $50,000 and $417,000 then your loan is within the conforming loan limits. However, many times there are additional add-ons to the interest rate when your loan is outside these parameters. For example, if you have a loan between $417,000 and $650,000 your rate is robably going to increase by about .75%. If you loan amount is between $650,000 and $1,000,000 you can usually expect another .50% increase in your interest rate. And if you loan amount is over $1,000,000 then the rate may increase even more. At the same time, a loan amount under $50,000 can similarly increase your rate for each $10,000 decrease in loan amount.

#10 FACTOR THAT DRIVES INTEREST RATES IS THE TYPE OF PROPERTY THAT YOU ARE PURCHASING. For example, most rates are based on what we call in the industry “stick-built, single family, detached, primary residence.” This basically means that the home you are purchasing is a regularly built home (not manufactured or made out of unusual materials such as logs), is a stand-alone house (rather than a condominium) and is intended to be lived in by one family (rather than a home that is split into multiple living sections) and is going to be lived in by you (rather than rented out or used as a vacation home). If the property you are buying is outside of this norm, your interest rate may be affected. Example, condo’s, log homes, manufactured homes, modular homes, duplex, quads, etc

#11 FACTOR THAT DRIVES INTEREST RATES IS PRIVATE MORTGAGE INSURANCE (PMI). Lenders require mortgage insurance on loans that are more than 80% of the sales price of the home. There are options to adjust the interest rate and reduce or have the lender buyout the PMI premiums all together.

#12 FACTOR IS THE OCCUPANCY OF THE HOME. For example, is it going to be your primary residence/owner – occupied, or a 2nd home, or an investor home. On some programs there is rate add ons for 2nd homes, and investor homes rates vary about .25 to 1 % depending on the down payment.