There are a number of factors that determine the mortgage interest rates for any given borrower. These factors include: the type of loan you are applying for, (fixed vs. adjustable) your credit score, the Loan to Value ratio of your home, your documentation, the type of property, and the points you pay. If you opt for a fixed rate mortgage your interest rate will be higher than an adjustable rate mortgage. Fifteen-year mortgage interest rates are also typically lower than 30 year interest rates. Generally speaking, the higher your Loan to Value ratio, the higher your interest rate will be. Your documentation can also affect the interest rate of your mortgage. Some programs require very little documentation of your assets or income; these programs serve a purpose, but typically charge much higher interest rates. The more documentation of your pay stubs, tax returns, and bank statements you can provide, the easier it will be for you to quality for a low interest rate mortgage. The type of property you are refinancing can also affect your mortgage interest rate. Interest rates are typically lower for your primary residence vs. second homes or investment properties.
Points act to lower the interest rate you qualify for by pre-paying a portion of the interest before the loan. A “point” or “discount point” is equivalent to 1% of the loan amount and usually reduces or “discounts” the loan rate by an eighth of a percentage point. For example: You want to get a loan for $100,000 to buy a home. Each “point” would cost you 1% of $100,000 or $1,000 but would reduce your loan’s interest rate by .125%. The lender might offer you an 8.0% loan with zero points, a 7.875% loan with one point, or a 7.75% loan with 2 points.
Points, like the down payment, are paid at closing. In some cases, lenders will allow borrowers to finance the points over the term of the loan. Lenders sometimes use points to make their interest rates appear lower. Be aware that lower interest rate offered by a lender may translate into higher points requirements.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
