Generally lenders set a standard rate, which is also called the standard variable rate of interest. As the name suggests, it’s the common rate that is offered to mortgage customers. However, lenders often offer a variety of discounts on the standard variable rate depending upon the borrower’s case of ideality. These factors help a borrower determine several phases like if they have any chance of being approved, or why they might rejected. Being aware of the factors determining your mortgage rate may help to place yourself as an ideal borrower in the eyes of the lender and to get a better rate reduction.
Top 12 Factors that Determine Interest Rate
Credit Score: The higher your credit score, the lower your interest rate will be.
Credit History: Your payment history contains the information about how you have repaid credit you already have extended on your credit accounts. Your credit history makes lender take decision on your part to take risking of lending you or not. The greater the payment history, the better the interest rate.
Employment Type and Income: Self-employed, hourly employed, incentive-based pay – these all determine the risk factors of whether you’ll be able to pay back the loan.
Loan Size: How much money do you need? Most of the times if you are requesting an amount under a certain level (i.e. $100,000), there may be a small increase in rate.
Loan-to-Value (LTV): What percentage is your loan amount to the value of the property? Normally, the lower the percentage of your LTV, the lower the rate you’ll get.
Loan Type: Fixed, variable, adjustable, balloon – these all have varying rates because of the distinction 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.
Length of Term: The shorter the term on your loan, the quicker you’ll be paying down the debt; possibly resulting in a better rate. It’s important to keep that in mind that in such scenario your payments will most likely be higher, so you have to make sure whether you can afford it.
If you get a payment plan that allows for an annual or semiannual payment rather than a monthly one, you can expect a higher rate.
Property Type: Normally, a residential house has lower interest rate than a commercial property of 50 acres or more because of the increased risk that comes with a property.
Co-borrowers: Will there be other people on the loan, and if so, what does their credit look like? Lender will assess the credit report of each party involved in the deal and use the information to determine the rate.
Debt Ratio: How much money does the individual make monthly versus the cost of monthly bills.
Documentation Available: Do you have all the documentation (bank statements, taxes, retirement accounts, etc.) to show your assets? This will help ease the risk factors for a lender and help lower the rate.