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Understanding Mortgage Rates
Mortgage rates refer to the interest you pay on your home loan. It’s the cost your lender charges you for borrowing the money, just like the interest rate on a car loan or credit cards. When it comes to home loans, mortgage rates are a little more complicated because the loan amounts are so much higher.
To begin with, when you see a mortgage rate it is always followed by “APR,” the annual percentage rate. This is the interest rate for an entire year, or annually. However, the number you see does not reflect the final mortgage interest rate you’ll receive.
The mortgage rates and APR you see in the news or business reports are influenced by current economic conditions, government and other private investments that are all part of the larger U.S. economy. As you might guess, that means mortgage rates constantly change because they’re affected by large market influences neither you nor your lender have control over.
Additionally, when you start comparing lenders you’ll find they have different, and changing, APR numbers as well. That’s because the final mortgage rate you receive will include the costs associated with lending you the money like processing, underwriting, closing attorney and other fees. These can’t be determined until the final loan is approved.
When you’re ready to buy a home, there are additional considerations your lender takes into account that determine the interest rate on your loan. These are actually easy to understand. Some of them you even have control over. They’re described below.
What determines the mortgage rate on your home loan?
Your Credit Score
Your credit score is determined by looking at all your credit files to see how credit-worthy you are. This includes your outstanding loans, credit cards and the payment history on each of them. Your actual score is determined by analyzing a combination of your payment history on each account, how much you owe, how long you’ve had credit, if you’ve had any recent credit inquiries, and the types of credit you have. The higher your credit score, the more likely you are to get a lower mortgage rate. Learn more how your credit score for mortgage is determined.
The Size of Your Loan and Price of the home
The loan you receive is the difference between the price of your home and your down payment. A very large loan, which carries more risk for a lender, or a very small loan, that still requires a lot of paperwork, can sometimes result in a higher mortgage rate.
Your Down Payment
Generally speaking, the more money you have for a down payment, the lower your mortgage rate will be. But not all loan programs are the same, and your rate can depend on where your down payment comes from. It’s better if the money comes from your own savings or investments, which is a reflection of your financial stability and could give you a lower rate. If part or all of the down payment is in the form of a gift from a friend or relative, that’s more a reflection of their financial situation than your own, which could result in a slightly higher mortgage rate.
The Loan You Choose
PrimeLending can offer you many different types of loans, including conventional and government-back FHA, VA and USDA loans. They all offer different rate scenarios dependent upon their specific program details and the size of your down payment.