The type of loan that you choose greatly affects your mortgage rate, along with the current economic status, the kind of property that you want, and your credit scores. Your Mortgage's loan features can either increase or decrease the price, so it is important to know the different types of loan features and how it affects your mortgage rate over time.
Loan Features That Affect Mortgage Rates
Adjustable rate mortgages (ARMs) – An adjustable-rate mortgage is a type of mortgage where the outstanding balance throughout the loan varies. However, lenders will still get a low rate in spite of the inflations that can spike up the interest rates and other costs. Enticing a borrower to choose this loan feature would mean offering a lower interest rate (such as five to ten years).
Loan length – The loan length is a loan feature that refers to the amount of time that you need to pay the mortgage off. Lenders prefer a shorter loan length since it means lesser time to encounter a sudden interest rate risk. A shorter loan length also reduces the chances of a borrower to fail in paying because they have more equity as opposed to having a longer loan length.
Interest-only payments – Another loan feature is the interest-only payments, where you only pay for your loan interest for the first few years and then pay the remaining balance after that. The purpose of this feature is to wait for your income to increase as the years come to help you regain your footing. However, if you don’t, the lender will end up with a foreclosure.
Cash-out refinancing – It means taking out your old loan to replace it with a new one, then taking the difference in cash. Cash-out refinancing is a loan feature that is quite pricey since lenders believe it is too risky. The purpose of this is to extract the equity from the borrower’s home. Pre-payment penalties – A pre-payment penalty is like insurance for the lenders so that they are assured of profit from the mortgage. It avoids incidents wherein the borrower pays off the mortgage too early, making the lender lose profit from the loan. An early payoff by the borrower could lead to selling or refinancing the house, causing a deficit in the lender’s part. To prevent this from happening, pre-payment penalties are established by the lender.
Other Factors That Affect Mortgage Rate
There many other loan features that affect how your mortgage interest rates fare. Your credit score is one factor; basically, it is like your reputation with the bank since it shows them how reliable you are when it comes to finances. It includes your payment history, the length of your credit history, how you use your credit cards, and how many credit accounts you have. With a fairly good credit score, chances are, your mortgage rate will likely be lowered.
Another loan feature is the total amount of your mortgage loan. Lenders look at how they can profit from your loan, so a small mortgage loan will probably have a high mortgage rate for them to ensure a profit from it. Large mortgage loans will also have higher mortgage rates because lending a significant amount requires a bigger risk.
Another factor is the location of your home. Choosing a house in a peaceful community reduces the risk of failure in payment by the borrowers since living in a good community will not pose difficulties to the homeowners. Houses that are located near beaches or lakes are also pricier and therefore have higher mortgage rate, while those in the deeper parts of the country will have lower mortgage rates.
Lenders will also look into how much you are willing to pay for the down payment. This loan feature is like the indicator of how capable you are in paying off the loan – the higher the down payment, the lesser the mortgage rate will be. Lending a huge amount of money for a house is a great risk that the lender believes, so assuring them that you truly are worth the risk by paying 20% will help you gain their trust.
Paying off the mortgage can be extremely stressful and daunting, but knowing and understanding how each loan feature works will work to your advantage. Keeping these tips in mind will hopefully help in figuring out how mortgage rates rise and what you can do to prevent it.