Factors Determining the Interest Rate on a Mortgage

When you take out a mortgage to buy a home, you pay a staggering amount of interest over the years . The higher your bid, the more you pay. So what determines this speed? Obviously, your credit history probably plays the biggest role, but there are other factors that affect this as well.

As the Consumer Financial Protection Bureau (CFPB) notes , “Even saving a fraction of a percent of your interest rate can save you thousands of dollars over the life of your mortgage.” It is important to shop and compare rates from different lenders, but you also want to know what these lenders think. The CFPB states that in addition to your credit history, lenders also look at the following to determine your rate:

Home Location : Many lenders offer slightly different interest rates depending on the state you live in. To get the most accurate rates using our Explore Interest Rates tool , you need to specify your state and depending on the loan amount and loan type. as well as in your local area.

Down payment: Typically, a larger down payment means a lower interest rate because lenders see less risk when you have a larger stake in the property. So if you can safely set aside 20 percent or more , do so — you will usually get a lower interest rate.

Loan term : The term or duration of your loan is how long you have to pay off the loan. Typically, shorter term loans have lower interest rates and lower overall costs, but higher monthly payments. Much depends on the specifics – how much less the amount you will pay as interest, and how much higher monthly payments can be, depends on the length of the loans you are considering, as well as on the interest rate.

Of course, these are not the only factors. The type of loan and the type of interest rate (variable or fixed) also matter, but these are factors that you may not count on. The CFPB also has an Explore Interest Rates tool that you can check here to see what your rate will look like depending on these various variables. Check out their recent post for more on each factor.


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