What Determines Mortgage Rates?
Many investors grow frustrated, wondering why they can’t obtain loans with the latest new rates that are heavily advertised online and in the news. This is because banks use several important factors when considering mortgage eligibility and interest rate charges.
Credit Score – Traditional banks lend based on the borrower, not necessarily the property. This means that borrowers are subject to credit score scrutiny. Most lenders have credit score brackets. The highest bracket is for scores between 740 and above. The second starts at 700 and then it decreases to 680, 660, 640 and 620. After 620, it’s impossible for most borrowers to obtain a bank-funded loan. Interest rates increase by 20 basis points (or 0.2 percentage points) with each bracket. This means that borrowers with credit scores exceeding 760 are paying far less for a 30-year loan.
Region – Varying across the country, mortgage rates are higher in areas that report a higher cost of living. It’s not a significant increase, but it is between 10 to 15 basis points.
Points – Points are nothing more than pre-paid interest, which helps reduce the overall mortgage rate. However, each point costs one-percent of the total loan amount, so while it may reduce the mortgage rate, it can also end up costing borrowers more out of pocket if they don’t plan on owning the house for a long period of time. Negative points can sometimes be used to increase the interest rate, but also helps borrowers forgo costly closing fees.
Down Payment – The amount of money a borrower puts down greatly impacts the loan rate. A smaller down payment generally means a riskier loan, so lenders charge higher mortgage rates. For borrowers that do not have more than 20-percent of available funds, many banks require Private Mortgage Insurance (PMI). The annual PMI charge equals 0.05-percent of the total amount borrowed, essentially increasing the interest rate by half a point, or percent.
Lender – Interest rates vary by lender. Lending programs vary by lender, which often structure loans and fees in various ways. This is why it’s recommended that borrowers shop around before agreeing to and committing to a loan.
My Hard Money Lenders is a comprehensive website that features hard money lenders by state. This easy-to-use directory highlights fast money lending, which is ideal for real estate developers that may not qualify for traditional bank financing.
Hard money lenders offer several loan options, including a bridge loan, which helps provide interim financing for investors while they sell one project and purchase another. This type of financing can also be used when a borrower is selling a home and does not have the necessary funds to purchase another home prior to receiving funds from the closed sale.