The Lowdown on Loans – What Determines Your Mortgage Rate?

Understanding mortgage loans and interest rates can be confusing and frustrating for many buyers. It doesn’t help that most advertised rates are just a marketing ploy to lure you in!

In fact, a lender looks at several factors to determine an interest rate based on YOUR specific financial situation, including your credit score, your down-payment amount, your loan amount, and even the type of home you purchase.

The bottom line is — Every loan scenario is unique, which means you might (most likely will) get a different interest rate than the person next to you (and the one you saw advertised).

No One-Size-Fits-All Interest Rate

Here are 4 important points to be aware of before you go shopping for a loan:

• Rates vary depending on the market and multiple borrower-specific factors. That’s what makes it complicated.
• There are tons of different banks, credit unions and lenders that offer entirely different types of loans and correspondingly different interest rates.
• The rates you see advertised are usually meant for someone with perfect credit, applying for an owner-occupied single-family home loan, with a big down-payment.
• Your scenario is unique, so it’s good to know about all the factors lenders are interested in when you apply for a loan.

Loan Purpose

The two purposes for a mortgage loan:

• A purchase money mortgage applies to the purchase of a principal residence, second home or investment property.
• A refinancing loan is when you want to obtain new financing for an existing loan. You will probably get a lower rate for a purchase money mortgage than a refinance.

Loan Amount

Your rate will be different depending on the size of your mortgage. When you hear things like jumbo loans, high-value loans and conforming loan limits. These are loan limits for each county. King, Snohomish, Pierce and Kitsap have different limits.  These different categories have differing rates.  Conforming and jumbo loan limits are set annually by Fannie Mae. They change every year. High cost counties like King County have a multiplier.

Credit Score

This one is pretty simple: the higher your credit score, the lower your rate.

This is the single most important factor to determining your mortgage rate. But, your score isn’t the only thing that matters; what it says on your credit report matters too!

If there are two of you purchasing a home, and one of you has bad credit, it is sometimes better to leave them off the mortgage application. Your lender can help figure this out.

Loan-to-Value Ratio

The loan-to-value ratio is the loan amount as a percentage of the total appraised value of the property. The more money you put down, the less you borrow, so a high down payment leads to a lower loan-to-value ratio. Less money down leads to a higher loan-to-value ratio. The higher the loan-to-value percentage, the higher your mortgage rate will be.

Property Type

If you’re purchasing a single-family residence, the mortgage fees will be slightly lower than if you purchase a condo. This is because a condo is part of a larger complex, so if other owners in the complex miss a payment or there are vacant condos, your condo will lose value. Interest rates will be even higher for a co-op.

Occupancy Type

There are three types of occupancy: owner-occupied, second home or investment property.

A second home will have slightly higher mortgage rates, and an investment property may be even higher still. This is simply because there’s less of a chance that a homeowner will walk away and miss payments on their own residence.

Debt-to-Income Ratio

This is how a bank determines how much home you can afford.

Your monthly liabilities are monthly payments for debt like a car loan, student loans and credit card payments. The debt-to-income ratio is your monthly liabilities divided by your monthly income. The lower your monthly debt payments, the lower the percentage, the lower your mortgage rate.

First Steps to Take

This is all about risk. Lenders base the interest rate they give you on how much risk they’re undertaking by loaning to you. That’s why I will always give you as much information as possible about the process and how to prepare your finances.

Different lenders will offer different loans and rates, so the more you know, the better your rate will be.  I have great lenders I can connect you with that have low rates and great service.

All of this can feel overwhelming and complicated, but don’t worry – you’re not alone!

No matter what your loan scenario is, I know all about mortgage rates and the lending process. I’m here to answer all your questions and lead you step-by-step to your best deal. I’m sure you have more questions after reading this. The best way to get your questions answered is to chat over a cup of coffee or online. I’ve got time this week. Just grab a time on my calendar. As always, I’m your go-to resource for all things real estate!