How Your Mortgage Rate Is Decided
Every day mortgage rates change, sometimes by a little, sometimes by a lot, they are determined by a government agency known as the federal reserve, they meet several times a year and you can view their schedule here. This is the entity that gauges how much money will cost to the larger banks and businesses, who in turn loan that money out to people like you and I.
The Individual Factors That Determine What Your Rate Will Be
Different loans have different rates associated with them, primarily there is a difference between government loans like FHA / VA and non government Conventional loans. The reason is they are intended for different types of borrowers. FHA / VA / USDA loans are guaranteed by government entities and offer lower rates with fewer L.L.P.A’s. ( Loan Level Price Adjustments), therefor making the rates more consistent for borrowers that have varying credit scores. You can read more about loan level price adjustments here.
A good example would be a borrower who is applying for an FHA loan with a 660 credit score, they will likely get the same rate as a borrower applying for an FHA mortgage that has a 630 credit score. Because the L.L.P.A’s do not affect the interest rate as much.
On the other hand you have conventional loans, which are more sensitive to things like credit scores and down payments, they have more L.L.P.A’s then their government counterparts. That is why FHA loans can sometimes be a better alternative for a person who has a lower credit score.
How Down Payment Affects Your Interest Rate
Basically your down payment doesn’t have a dramatic affect on your interest rate, what really changes your interest rate is your credit score; because it determines which loan product is best for you. FHA loans will have a different set of L.L.P.A’s than Conventional loans
FHA also has a different set of mortgage rates, so the interest rate is more determined by the mortgage product which is determined by your credit score.
Mortgage Lengths and Your Interest Rate
Beginning at a 15 year term, your mortgages interest rate will decrease according to the length. This means the rates on a 20 year fixed rate are the same as a 25 and 30 year but you can expect to see a dramatic decrease when you apply for a 15 year (or less) mortgage. The reason for this? Lenders are willing to collect less interest on a shorter term because they are confident they will get their money back in a shorter period of time. A lot less can go wrong in 15 years than 30 years, lenders know this and feel it’s a safer “bet”. A nice feature of 15 (or less) year mortgages is that they do not have any L.L.P.A’s like the longer termed mortgages do. They have the same down payment requirements as well, meaning First time home buyer loans can apply with just 3% down.
I hope this brief article clarified some things when it comes to this subject. If you want to discuss it further please Get started here or contact me directly from the information below.
Thank you!
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Justin Scott
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Executive Mortgage
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Green Bay WI 54301