If you've decided to buy a home or refinance your mortgage, you may be puzzled by the different interest rates you've seen advertised for home loans. You're not alone: Many home buyers and homeowners are confused when they discover they don’t qualify for these rock-bottom interest rates.
The reality is that the interest rate you’ll pay on a loan is determined largely by your own personal situation. Even if you don’t meet the requirements for the best-of-the-best rates that you've seen advertised, that doesn't mean you won't be able to qualify for a loan or won't be offered an attractive interest rate that you'll be able to afford.
The interest rate you'll be offered will depend on:
● Credit score. Your credit history and credit score will have the greatest effect on the interest rate you'll be offered. The higher your score, the lower your interest rate likely will be. A credit score is a numerical representation of how well you've handled other loans and credit cards in the past.
● Type of property. The interest rate you'll be offered also depends on the type of property you want to purchase. You'll generally pay a higher interest rate to buy a second home or a property you want to rent out to tenants than you will to buy a home you intend to occupy yourself.
● Loan term. Interest rates tend to be higher on 15-year loans than they are on 30-year loans. That means you'll likely be offered a higher rate if you choose the shorter term.
● Loan amount. If you want to borrow more than $417,000, your mortgage may be considered a non-conventional or even "jumbo" loan, in which case, you'll pay a higher interest rate due to the larger loan amount.
● Loan-to-value (LTV) ratio. Your loan-to-value ratio is the total amount of your mortgage divided by the appraised value of your home or the home you want to buy. If you have only a small downpayment, or not much equity, you'll likely pay a higher interest rate. Taking out cash can raise your interest rate as well. Read more about LTV ratios.
● Location. Interest rates vary from lender to lender and state to state. Some states simply have lower borrowing costs on average.
When you compare the interest rates you’re offered with advertised interest rates, keep in mind that some advertised rates require payment of discount points, which makes those rates appear to be cheaper than they actually are. A point is an upfront fee that's equal to 1 percent of the loan amount. Points don't directly influence the interest rate you'll be offered, but you can pay points to reduce the interest rate on your loan. Use the LendingTree Discount Points calculator to figure out whether paying points up front will be worth the cost over the term of the loan.
Since the interest rate you'll pay on your loan will depend largely on your own situation, make sure you’re comparing apples to apples when you’re shopping for the best loan product and interest rate. It's a good idea to get loan offers that are customized to your needs and financial profile from multiple lenders. That way, you'll be able to make a smart decision about your mortgage options.