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What Can Affect Your Mortgage Rate?

Posted by:  Chip Poli
2013-06-04 11:21:11

Before the introduction of what is called “Loan Level Pricing Adjustments,” mortgage interest rates relied primarily on the credit report, income and assets when assigning an interest rate. Typically the mortgage rate was a one-size-fits-all approach with specific adjustments for those with better credit or less money down. Today however, different factors can affect a mortgage rate provided to a consumer that differs than what might be quoted in an interest rate advertisement on a website. What factors can lower or raise an interest rate?

Credit Scores

A borrower’s credit score can impact what the final rate will be on a mortgage. Such adjustments can be made if credit scores fall between ranges of 620-639, 640-659, 660-679, 680-699, 700-719, 720-739 and anything equal to or above 740.

An interest rate adjustment might be as little as one-eighth of one percent and there’s no “wiggle room.” If a borrower has a score of 719 and could get a slightly better rate if the score was 720, there’s little that can be done.

Equity

The amount of down payment or the borrower’s equity position can affect an interest rate. Typically the larger the down payment the better the rate might be. Conventional loans with a down payment of 5 percent can have an interest rate that is nearly one-half percent higher compared to a loan with 30 percent down in some cases.

Credit and Equity

When combining both credit and equity when adjusting an interest rate, more equity can offset a lower credit score. For example, if someone has a credit score of 659 with 10 percent down might be quoted a rate of 3.50 percent on a 30 year fixed rate loan. But if that same borrower put down 40 percent, the rate might drop one-half of one percent. The permutations between down payment and credit score are many.

Cash Out

When someone refinances a mortgage and pulls out additional equity in the form of cash, the interest rate may be the similar but there can be an additional one-quarter of one point added onto the cost of the loan. If a borrower selects a 15 year fixed rate of 3.25 percent with no points, a cash out refinance might turn the quote into a 15 year fixed rate with .25 points.

Property Type

The type of property being financed can also have an impact. A single family home will have the best rate available while rates for condominiums, town homes and multi-unit properties will be slightly higher.

Your Mortgage Rate


Occupancy

Interest rates will adjust based upon the occupancy of the borrower. Non-owner occupied, or rental properties will have higher rates than those reserved for an owner’s primary residence. Adjustments for rental properties can be as high as one-quarter percent or more.

Loan Amount

Finally, there can be adjustments based upon the loan amount itself. Many lenders charge extra if the loan amount falls below a certain level, say a mortgage of $50,000. At the same time, loans above the conforming loan limit of $417,000, called “jumbo” mortgages, will have higher rates compared to loans below that limit.

That’s a lot to consider and sometimes why it’s hard for a lender to nail down a specific rate quote until after the property is identified, the amount of down payment is considered and the credit report reviewed. Up until that stage, it’s all a general estimate.

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