Resolving Your Mortgage Interest Rate Questions
Are you planning to get a new home but mortgage interest rate questions are lingering
in your mind and you would like to know what goes in determining your interest rate? This article focuses on factors that determine mortgage interest rates and the loan options available.
There are several factors which influence how much money you will pay in interest for a loan. The way you previously handled your debts is one of them. The following are the three main factors which lenders consider when you apply for a loan. It will also help you to resolve your
mortgage interest rate questions.
First factor is your credit rating, which is basically a report which is generated by collecting data from lenders about the history of your borrowing and paying back credit. The Fair Isaac Corp. is the major producer of credit scores called the FICO score. They take the credit information like on-time payments (for consistency), the credit utilization (if any accounts are maxed out), credit history and types of credit used like credit cards, car loans etc. If you have a good credit with your monthly income far surpassing your debts you may get an approval for a low
home mortgage interest rate. If you have a poor credit score you may want to reestablish your credit history by paying-down debts. This does not mean a loan wont be approved. It is just that the lenders evaluate your loan to value ratio.
Second is your debt to income ratio which is the percentage of a persons monthly gross income that goes toward paying debt generally on a monthly basis. A high debt ratio indicates that the monthly expenses are unmanageable and hence discourages lenders from extending any loans. An idle debt to income ratio is under 15 percent to get a potential lender.
Lastly, your loan to value (LTV) ratio is a ratio that depicts the relationship of a loan amount with the value of a property. It is obtained by dividing the amount of a loan by either the sale price of the property or the propertys appraised value, which ever value is lower.
The types of loans available also give you a spectrum of options in getting a good interest rate according to your circumstances. They are Federal Housing Administration (FHA) loans for the first time home buyer, hybrid adjustable rate mortgage (HARM), adjustable rate mortgage (ARM) and fixed rate mortgage (FRM).
After the subprime meltdown it has become difficult for first time buyers to qualify for a mortgage. FHA loans are easier to get compared to conventional mortgages; FHA requires only 3% of the loan value to be paid at closing compared to the conventional loans which require 20% down plus closing costs.
Another option is the hybrid ARMs mortgage. The mortgage has few years of fixed payments and then it turns into an adjustable rate. Some hybrid ARMs are called 2/28 or 3/27 where the first number refers to the number of years the loan will have a fixed rate and the second number refers to the years the loan has an adjustable rate. While ARMs are those mortgages which have adjustable rates from the beginning and the payment changes over time, mortgages where the rate is fixed for the life of the loan are called FRMs.
Calculate mortgage interest rateandcompare monthly payments to find the right type of loan for you.
Carefully assess these options and see what will be beneficial for few years down the line and how much you will be affected when the rates fluctuate. Rest assured that such complex decisions can be made easier with the assistance of reliable guides to identify which solution works best in your situation.
by: Ask Bill
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