When you are thinking about getting a home loan, one of the first things most borrowers do is look at the current mortgage interest rates. These rates play a significant role in what your payment will be, which can affect how much money you can borrow and what home you can buy.
It is a good idea to shop around, but with the caveat that it’s important to also understand that different lenders can have different requirements or different loan options that may not make sense for every borrower, so before you just jump on the lowest rate you find, make sure you understand the loan you’re getting.
Rates are Tied to Borrower Risk
The mortgage rate you can get is tied to the level of risk a lender assigns to you as a borrower. A borrow with higher risk will have a higher interest rate than a low-risk one. Lenders use various measures, beginning with your credit score, to predict risk—if you have paid your bills on time in the past and have steady employment, you will be seen as less risky than someone with poor repayment history, bankruptcies, or other financial red flags.
Other things that the lender takes into account when determining your interest rate could include:
- Analysis of your current financial position
- Credit history
- Employment history
- Debt-to-income ratio (how much debt you owe as a percent of your monthly pay)
- Down payment
Different Lenders Evaluate Risk Differently
While the general metrics for measuring a borrower’s risk are pretty standard from one lender to another, different lenders have different models and algorithms they use for predicting and measuring your risk as a borrower. For example, some lenders might put more weight on a high debt-to-income ratio (seeing you as a riskier borrower) while another might focus on your high credit score or see that you have a 20% down payment and view you as less risky.
Loan Products Can Affect Borrower Rates
In addition to risk algorithms, the specific types of loans available from a lender also have an impact on your rates. For example, one lender may have a 5-year ARM (adjustable rate mortgage) with a very low initial rate that seems much better than a 30-year fixed, but your rate could go up significantly after year 5 unless you refinance or pay off the loan in a lump sum. In another example, if you only have a 5% down payment the lenders may have specific loans available to get you into a home without 20% down.
Because risk models and loans vary by lender, it can benefit you to “shop around” for mortgage rates. Integrity First Lending is focused on helping borrowers get the best loan rates possible to purchase home, so make sure when you’re shopping around that you get a quote from us. Contact us today to learn more.