Who Determines Home Mortgage Rates?

Understanding mortgage can be overwhelming and frustrating. When seeking a mortgage, you might encounter a situation where the financial institution will not offer you the lowest mortgage rate as promised in their ads print and commercial broadcastings. What you do not know is that there is a web of interconnected and intricate factors; besides the Federal Reserve and the financial institution, that determine how much you get as the mortgage amount and at what rate. Lenders approve mortgage loans based on the following factors:

Credit score

Your credit score is the leading factor that determines your home mortgage rate. Lending institutions use your credit report that indicates your loans, credit cards, and payment history to determine how reliable you will be paying off your mortgage. Finance expert Patti Frank from the American Mortgage Group advises that a credit score of 760 and above will guarantee you a lower interest rate on the mortgage. Understanding credit scores are complicated since you may have several varying. However, you should familiarize yourself on how mortgage lenders evaluate your credit history such that you have an idea of what to expect from the lender based on your report.

Type of Mortgage Loan

There are several broad categories of mortgage loans available to potential homeowners classified into conventional, FHA, RHS, and VA loans. Rates are significantly different based on the type of loan you choose to purchase. As a mortgage shopper, you should educate yourself about the various options as well as the pros and cons from the loan options guide.

Loan to Value Ratio

Often understood as the risk assessment ratio, the LTV ratio is used by lenders and financial institutions to determine your mortgage rate and eligibility. LTV is calculated as the amount of mortgage lien divided by the appraised value of the property and expressed as a percentage. Lenders will usually assess your LTV ratio during mortgage underwriting to determine their risk exposure. If you have a high LTV ratio, then your mortgage rate is consequently higher since you have a lower stake with the property. If you need to purchase or refinance your mortgage loan, it is important to calculate your loan-to-value (LTV) ratio and ensure it is on the 80% mark or lower for you to enjoy lower rates.

Type of Interest Rate

Mortgage loans will always be affected by the interest rates, which can either be fixed or adjustable rates. With a flat rate, you are certain of how much you will be getting. For adjustable rates, lenders will offer a below market rate for a period of three to seven years after which, the rate goes up or down based on the prevailing market conditions. It would be preferable for you to obtain an adjustable-rate mortgage at an initial low rate but expect the rate to go up later. Moreover, you can learn more about interest rate types and evaluate how your choice affects you in the long-run.

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