When you buy a home for sale in Midland, you know that several factors come together to determine what a lender is willing to offer you. In fact, there are several reasons a lender will give you a specific interest rate. This guide explains.
3 Factors That Affect Your Mortgage Rate When You Buy a Home in Midland
Though these aren’t the only three factors that affect your mortgage rate when you buy a home in Midland, they’re among the biggest:
- Your credit score
- The points you pay for
- Details about the home
Here’s a closer look at each.
Factor #1 That Determines Your Mortgage Rate: Your Credit Score
Your credit score – along with other information about your financial situation – plays a big role in what interest rate a lender is willing to offer you. The bottom line is that the less-risky a lender feels you are, the more favorable your interest rate will be.
With that said, there are some thresholds that come into play. If nobody is getting a mortgage loan for less than 3.5 percent interest, you’re not getting one either – it’s not as if a perfect credit score and plenty of money in the bank is going to qualify you for a home loan at 1 percent interest.
Your lender will review your whole financial situation, including your debt-to-income ratio, credit score, job history and tax returns, to make a determination on what rate you qualify for.
Related: Does mortgage approval matter when you buy a home?
Factor #2 That Determines Your Mortgage Rate: The Points You Pay For
Many lenders offer to let you pay for “points.” These points are upfront fees that lenders charge in exchange for a lower interest rate. That means you pay more when you sign for your loan, but your monthly payments will be lower because you’ve already paid your lender to give you a lower interest rate.
Lenders calculate points based on the loan amount. Generally, every point equals 1 percent of the loan amount. If you’re taking out a $500,000 loan, one point will equal $5,000. If you ask about points – or if your lender brings them up – your lender will tell you how many points will lower your interest rate (and by how much each point will lower it). For example, your lender may say, “Your interest rate with zero points is 3.9 percent. With two points, it’s 3.5 percent.” If you wanted to pay for those two points and get the 3.5 percent interest rate, you would pay the lender an additional $10,000 (if you’re borrowing the $500,000 in this example).
Every lender is different – and so are the terms that they offer. That means it’s definitely in your best interest to talk to multiple lenders before you make a borrowing decision. It’s a good idea to shop around for the lender that best meets your needs.
Related: STOP! Don’t make an offer on a house in Midland before you read this
Factor #3 That Determines Your Mortgage Rate: Details About the Home
Lenders also look at a home’s pertinent information when deciding on an interest rate. This ties into figuring out how much of a risk you are as a borrower.
Lenders look at things like the home’s price and condition, what type of property it is (such as a single-family home or a vacation home), and how much money you’re putting down. These things are important because they can indicate to a lender how likely you are – based on past data – to continue making your payments if times get tough. For example, if you lose your job, you may be less likely to keep making payments on a vacation home than you would on your primary residence; that means lenders will charge you a higher interest rate because letting you borrow money for a vacation home is riskier than letting you borrow for a primary residence.
Related: Ignore these 3 mortgage myths
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