There are a great number of factors that affect the interest rate that you will receive on your mortgage loan. Lenders base the interest rate on how much risk you represent to them. They are lending a considerable amount of money, and need to know that they will receive a safe return on their investment.The type of property being used to secure the mortgage may also have an effect on the interest rate. It is no secret interest rates on commercial properties are higher than that on residential houses. Some banks also charge higher interest rates on cooperative units.
The main and most obvious factor in determining your interest rate is going to be your credit history and your credit scores. Your credit actually affects many different things other than just mortgage interest rates. Your homeowners insurance premiums, auto-insurance premiums, credit card rates, all other loan rates, and much more. This is why it is very important to keep your credit in good standing, all payments made on time, and not to let accounts go into collection.
The mortgage program can also determine your interest rate. Obviously 30 year fixed rates will be different than 15 year fixed rates. The same is true if you are doing a stated income, or no doc loan. The less documentation, the greater the chance that the interest rate will be higher.
The residency status of the property will also affect your interest rate. Investment or Non Owner Occupied properties will carry a higher interest rate due to the increase risk involved.
Loan to value ratio is another key driver of the interest rate. That is, the amount of the mortgage loan divided by the appraised value of your home. If below 80%, you'll qualify for the best rates. As the LTV increases, rates will also increase as this represents additional risk for the lender.
The type of documentation you can provide to verify income can affect the interest rate. The least amount of risk and thus the lowest rate is for full documentation, W-2s and pay stubs. The most amount of risk is for "No Doc" loans. There are many different levels in between with varying ways to document the income. Your mortgage broker can help you determine what type of documentation is appropriate for your situation.
Your payment history on your mortgage is also very important. Obviously, if you have never missed a payment on your mortgage you will qualify for the highest rating. Typically lenders will review your payment history over the last 12-24 months.
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