Before we dive deeper into this common question, it’s important to understand that not everyone will qualify for the exact same mortgage rate. Your qualified mortgage interest rate will be calculated based on a number of financial indicators. In addition, your monthly mortgage payment amount will be unique as a result of fees, insurance, loan amount, loan type and various other factors.
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You can get a rough idea of your mortgage rate and monthly mortgage payments by using online mortgage calculators (click here for the Moreira Team Mortgage Calculator). The interest rates will be based on national or regional averages and you can always search online for the current average mortgage rate. However, it’s just the average. It is not exactly the rate you will get when you apply for a home loan.
Now, we can discuss some of these key financial factors that will be reviewed when you are applying for a mortgage loan. This is how mortgage lenders will determine your home loan eligibility and calculate your qualified mortgage rate.
Here are some of the items that will have an impact on your interest rate:
Mortgage Loan Type
There are numerous different loan programs that may be available to you as a home buyer. There are conventional mortgage loans, FHA loans, VA loans, USDA loans and even jumbo loans for higher non-conforming home values. Each one will offer slightly different average rates that will essentially act as the starting point for your personal mortgage rate. We’re talking mainly about fixed-rate mortgage loans here. You may also explore adjustable-rate mortgage (ARM) options, which will have fluctuating rates based on national averages (but still adjusted personally based on these financial factors we’re discussing).
Mortgage Loan Amount
Naturally, the amount you are borrowing to buy a home can affect your mortgage interest rate. A borrower applying for a $200,000 home loan will likely get a much lower mortgage rate than they will if applying for a $500,000 mortgage. The mortgage lender is taking more risk by loaning out more money, so a higher interest rate provides them additional protection. In other words, it costs more to borrow more.
Your mortgage lender will collect personal finance information and documentation that will be reviewed carefully. It is highly recommended that you get pre-approved for your mortgage loan before your home search and ask for detailed monthly payment estimates showing all fees, insurance, taxes, etc. This will ensure you are a qualified loan candidate and help you understand how much you can actually afford to buy.
Your lender will look at your current income and employment situation, as well as your employment history. They will run a hard credit check to learn your FICO score. They will review your bank statements, tax returns and other financial documentation. Lastly, they will calculate your debt-to-income (DTI) ratio. This is your current average monthly debt payments (credit card minimums, car loans, student loans, etc.) divided by your current average monthly pre-tax income.
As you might expect, you will be able to qualify for a lower mortgage rate when you have a stronger financial standing. A lower DTI, high credit rating and solid employment/income history will all help you get the lowest possible interest rate for your mortgage loan. Those who have weak credit or shaky financial records may still be able to qualify for a home loan. They just may end up paying a higher interest rate if the lender feels they present more risk than a more qualified borrower.
Another very important factor in calculating your mortgage rate will be your cash down payment. This is how much money you are willing and able to put down at the beginning of the loan. Some special loan programs like VA loans for military personnel/veterans and USDA loans for low-income rural home buyers can allow you to get a home loan with zero down payment. Some conventional loans may allow you to pay as little as 3%, while standard FHA loans require a minimum down payment of 3.5%.
No matter what type of mortgage loan type you qualify for, you will want to save up and pay as much down as you can comfortably afford. The higher your down payment, the lower your mortgage rate will be. It decreases your loan principal amount and this helps you qualify for a lower interest rate on the loan. Most home buyers who pay less than 20% down will likely have to pay private mortgage insurance (PMI) payments until a certain amount of principal has been paid off. Some PMI plans will last the entire life of the loan. Be sure to ask your mortgage lender about PMI when estimating your monthly mortgage payments.
Lastly, the length of the loan will affect your mortgage rates. Most mortgage loans are 30-year fixed-rate loans, meaning you pay off the loan over a 30-year period and the rate stays the same the entire time. There are also 10-, 15-, 20- and 25-year fixed-rate loan options available that can allow you to pay off your mortgage faster with higher monthly payments. The good news is that shorter loan terms will generally mean lower mortgage rates. You may be able to pay off your loan sooner with a lower interest rate!
If you have questions about mortgage rates or want to get started with your mortgage loan application in the Atlanta area, contact Moreira Team today. We can walk you through everything you need to know, including calculating and locking in your lowest possible mortgage rate and getting pre-approved for your home loan.