There are many factors that determine the home loan rate that you will be charged on a new or refinancing mortgage loan. Knowing and understanding how each of the variables affect the interest rate will help you to make the best choice of loan.
Type of loan
The type of loan that you select has a significant impact on the home loan rate. A variable rate loan may start out at a low rate and quickly escalate to a much higher rate. In fact, this is one of the major reasons why homeowners find themselves in trouble when they purchase a home with monthly payments that are at the limit of their personal affordability and then the payments increase because the interest rates increase. A fixed interest rate may cost slightly more than a variable loan to begin with, but you know what the rate will be in two years.
Economy
The economy of the nation has an impact on the home loan rate, particularly if the loan as a variable rate loan. Often the loan rate is tied to the prime interest rate plus a certain number of points. Of course, when the economy is slowing down, loans are somewhat harder to get and the qualifying process may be more stringent. When the economy is booming and loans are easy, more people can qualify to get a mortgage loan because the restrictions are less onerous. People are more willing to take a chance on a larger loan when they feel positive about the state of the economy.
Credit score
When applying for a new loan, the loan broker will almost always check the credit score before deciding what the home loan rate will be. The higher the credit score of the potential borrower, the better deal can be put together with the broker. Conversely, if the credit score is low or if there is little credit history, the loan is likely to cost more or require a higher percentage of the total as a cash down payment. Careful attention to making mortgage payments in full and on time will allow the borrower to create a new a better credit history so that a refinance later will have a better rate.
Loan Term
Theoretically a loan can be for any length of time, and this factor is one that many potential borrowers don't think about. They just assume the best home loan rate will be at a 30 year mortgage term. Even conventional loans can be taken for 15 years, 20 years or 25 years. Shorter term loans cost much less in interest over the term of the loan, so even at a higher monthly payment and the same interest rate, the shorter term loan is a better deal, with significantly less money paid in interest.
Balloon payment
Another common way to structure a mortgage loan that will affect the home loan rate is whether or not there is a balloon payment attached to the payment of the loan. Often a mortgage will be structured to run for two or three years with a very low interest rate at the end of which there is a balloon payment that is the balance of the loan. At the end of the initial period, often the rate will increase, or the monthly payment will jump. Sometimes the entire loan is refinanced at that point.
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