What factors determine the interest rate for a specific borrower?
Economic conditions determine whether interest rates are generally high or low for everybody but there are other factors which influence the interest rate for each individual.
The main factors are:
Loan program – fixed rate mortgages have higher rates than adjustable, 15 year rates are lower than 30 year rates Credit score – the better your credit score the lower rate you will get.
Conversely, the lower your score the higher the rate. If your score is low enough you may not be able to qualify for any mortgage.
LTV – As mentioned above, generally speaking, the higher your
LTV ratio, the higher your interest rate will be.
Documentation – The more documentation your can provide, the lower your interest rate will be. There are programs that allow you to verify only your assets but not your income or even provide no documentation at all. These programs are great for people that need them but generally speaking if you have good income and assets and can document that with tax returns, pay stubs and bank statements, you may get a lower interest rate in return for the hassle of photocopying a lot of paperwork.
Points – Many people are attracted to mortgage lenders that offer no points or even no points and no closing costs. Of course, there is no such thing as a free lunch and typically the lower your closing costs, the higher your interest rate will be. As a rule of thumb, if you are planning to keep a property for more than 4 or 5 years, you should pay at least
two points in order to reduce your interest rate. If you are planning to move in 2 – 4 years, you should probably not pay points. If you are planning to move in less than 2 years, you probably shouldn’t refinance at all! Ask your broker to provide you with quotes for a mortgage with and without points and discuss with you the best choice for you in your situation.
Property type – Interest rates are always lower for primary residences as opposed to second homes and investment properties.
What is LTV? How much will closing costs be?