Down payment, credit score are key to loan interest rate
Securing a home loan is probably one of the most stressful parts of buying a new home. To get the best loan possible, it’s important to know what factors affect interest rates — a fraction of a percentage point can translate into thousands of dollars less or more over the life of a loan.
“When rates increase by 1 (percentage point), a buyer loses 10 percent in purchasing power,” said Michael Deery, a mortgage specialist and president of Citywide Financial Corp.
Since December, interest rates have gone up threequarters of a percentage point and are now in the 4.375 to 4.5 percent range for a conventional mortgage loan.
Deery said that means a buyer who could afford a $600,000 home in December can only afford a $555,000 home today.
That’s why it’s important to get the lowest interest rates possible.
The single biggest factor homebuyers can control in getting lower interest rates is their personal credit scores. A high credit score generally leads to a lower interest rate. For a conventional loan, that score should be 740 or higher. (A good credit score is above 700 and an excellent credit score is above 800.)
Credit rates should be checked once a year. If you’re planning on buying a home, a credit rate check should be one of the first things you do, so you will have time to fix any errors or improve your score, which may take some time. Paying down credit cards, if you have a high balance, is a good way to get started, Deery said.
The amount of a down payment will also affect interest rates: The higher the down payment, the lower the interest rate.
Loans with a standard 20 percent down payment will have a lower interest rate, but that is often not an option in pricey home markets, especially for first-time homebuyers.
Mortgage plans that require borrowers to pay only 3 to 5 percent down are abundant, but those loans will then require private mortgage insurance. The insurance is either added to the cost of the monthly loan payment or absorbed in higher interest rates.
Also consider the length of a loan. Shorter terms have lower interest rates, but the monthly payment will be higher because you’ll have less time to pay off the loan.
If you’re planning on staying in your home only for a short time, you might want to look at adjustablerate loans instead of fixedrate loans.
Fixed-rate loans don’t change over the life of the loan.
Adjustable rates often start out fixed for a few years and then fluctuate with the market. The initial interest rate is sometimes lower than in a fixed rate, so if you’re planning on selling your home after a few years, an adjustable rate could save you money.
For those who plan on staying in their home for a longer period, fixed rates are a safer option. “We’re moving into a higher interest market in the next few years,” Deery said.