Some things in life are not fixed and stable. Take, for instance the price of airline tickets. So annoying. And then there’s the rate of interest charged on a mortgage. You may be charged an interest rate that’s much higher or lower than the rate the same lender offers your sister for the exact same loan amount. What gives?
Lenders consider several factors — some under your control and some not — when tailoring your mortgage rate. Let’s dig in.
Lenders all start in approximately the same place: with a rate that is set and adjusted periodically by our central banking system, otherwise known as the Federal Reserve or “the Fed.”
Credit scores range from 300 to 850. High scores (700 and above) tell a lender that you’ve been pretty responsible with your finances. The less risk you pose to the bank, the better the deal they feel they can offer you. But if you look like you're a high risk — missing or making late payments, defaulting on a loan, maxing out your credit cards or carrying a high balance — your credit score goes down and your interest rate goes up.
Dropping a large down payment (you boss!) may often lower your rate. There's less risk to the bank if you're financing a larger portion of the home. This, by the way, is called "loan-to-value ratio” (LTV), a figure that compares the amount of the loan to the price of the house. Banks reward a lower LTV ratio.
Say you’ve been eyeing up a condo as well as a single-family home, both in the same price range. The loan for the condo comes with a higher interest rate than the home. And there’s a pretty solid reason for that: Lenders see more opportunity for things to go wrong when a property is managed by a lot of other people. And when things go south, the value of the whole building, including your condo, is affected.
If your rate is higher than you expected, there is sometimes the opportunity to pay points to get a lower rate. Points are prepaid interest owed at closing, with one point representing one percent of the loan. Paying points will lower your monthly payment and these payments are tax deductible. A good loan officer can help you figure out what makes the most sense for you. Sometimes, if the seller is motivated, your real estate agent or lawyer can negotiate a deal where the seller pays your points.
There are strategies you can put in place today to make the process easier down the road, says Tim Magee, president of Magee Mortgage Associates. Talk to a loan officer at the get-go. He or she can take a look at your credit score and make helpful suggestions. There are methods to get your score from, say, a 660 to a 680. And once you’ve found a home and signed the contract, says Magee, don't do anything that jacks up your credit profile, and, potentially, your mortgage rate. Don't open a new account. Don't close an account. Don't consolidate all your debt onto one card. Don't buy a stove for your future kitchen or a car for your future driveway. Those bills against your credit will show up when the lender does an in-file report before you go to closing.