While outside factors affect the interest rate- the economy, the housing market, the Feds, the treasury, etc. There are factors that affect the individual applicant as well.
When looking online at interest rates it is important to keep these factors in mind as there is no single interest rate available to a consumer. So, if you get a quote from a lender without them having all of the data that is below, then you are getting a rate quote that is subject to change when they get this information. The more information up-front, the more accurate your quote will be.
So, lets take a look at the most common factors.
21 Factors that can affect your interest rate
1. Credit Score
The higher your credit score, the lower the rate.
2. Credit History
The less credit history you have, the less knowledge a lender has of your repayment ability, possibly making you slightly more risky. The better the payment history, the better the rate.
3. Employment Type and Income
Self-employed, hourly employed, bonus-based pay – these all affect the risk factors of whether you’ll be able to pay back the loan.
4. Loan Size
How much money are you asking for? Often if you are requesting an amount under a certain level (i.e.$100,000) or over a certain level (jumbo) there may be a slight increase in rate.
5. Debt Ratio
How much money is made monthly versus the cost of monthly bills. The typical ratio that lenders looks at is 42%, but we can go as high as 56%.
6. Loan-to-Value (LTV)
What percentage is your loan amount to the value of the property? Typically, the lower the percent, the lower the rate.
7. Combined Loan-to-Value (CLTV)
This ratio includes not only the current loan you are wanting, but any additional loans on the property, such as a home equity.
8. Loan Type
Fixed, variable, adjustable, balloon – these all have varying rates because of the variation of risks. Depending on the situation, your initial interest rate may be lower with an adjustable rate than with a fixed rate but you run the risk of the rate increasing significantly later on.
9. Length of Term
The shorter the term on your loan (ie:15 years vs 30 years), the quicker you’ll be paying down the debt; possibly resulting in a better rate. It’s important to note that your payments will most likely be higher, so you’ll want to make sure you can afford it.
10. Co-borrowers
Will there be other people on the loan, and if so, what does their credit look like? All parties involved in the loan will be used in determining the rate.
11. Escrow Preference
Some lenders require escrows for residential or consumer loans. This means specific money put aside to pay for things like taxes, insurance, etc. If you choose not to escrow, your rate could be higher due to higher risk.
12. Occupancy Type
Typically, rental or investment properties have higher interest rates. Residency Rates will be lower if you plan to live in the house full-time versus using it as a second home.
13. Available Assets
What additional assets do you have as possible collateral? The more down payment you have, usually the lower the rate.
14. Closing Date
Depending on the market temperament, it can be important to lock in on a rate that is as close to your closing date as possible. The longer the rate lock period, the higher the rate will be.
15. Property Type
Single family residence, condo, manufactured homes, etc. will have different risk factors to a lender and the interest rates are typically higher for the latter which are perceived as higher risk.
16. Asset Seasoning
How long have you had your assets? There may be restrictions for assets owned under a certain time frame that could affect the rate.
17. Housing Ratio
What does the ratio from above look like when you add in the cost of the mortgage? Usually a good housing ratio is 28%, but these days it’s generally higher.
18. Improvements Needed
This will affect the value of the property. Remember that the lower the percentage of the loan amount to the value of the property, typically the better the rate. Renovation loans typically have higher interest rates.
19. Employment History
This also affects the risk to the lender. If you show a consistent history of employment, the better chance for a lower rate.
20. Cash-out
If you refinance and want to walk away from closing with money in your pocket, you may be increasing the percentage of loan to property value.
21. Seller Contributions
If the seller is able to contribute money towards closing costs, that will increase the amount you have available for a down payment.