Mortgage Rates Matrix: The Mystery Revealed
Ever wonder how your interest rate is determined by a lender? This article will provide you with an understanding and reveal the mystery. First and foremost, all interest rates are based on the two, five, seven or ten-year bond. So, a thirty-year fixed note is based on the ten-year bond and a two-year fixed note is based on the two-year bond. Generally, your interest rate on a traditional thirty-year fixed note will be slightly higher than if you wanted a two-year fixed note. This is because shorter-term bonds carry a lower interest rate so a two-year fixed note is always lower than a thirty-year fixed loan. Lenders then add a margin to those bond rates to get their base interest rate. Your final rate depends on the “risk” the lender believes you represent on repaying your loan. So, how does a lender determine your risk of repayment?
An interest rate is generally determined based on four specific “risk” factors: (1) your mid-credit score; (2) your loan-to-value; (3) your mortgage history; and (4) the ability to prove your income. Once these variables are figured, there may be add-ons to the base interest rate. These add-ons can include: property type (condo or single family), cash-out or no cash-out, owner or non-owner occupied property, interest-only or non-interest only loan, and loan amount.
Without going into specifics, the matrix is designed to give those with higher mid-credit scores and good payment history a lower interest rate because those individuals are judged to carry a lower risk of defaulting. For example, if you can prove your income, have a 720 mid-credit score and perfect mortgage history, you will generally get the best available interest rate because you represent a good risk that you will never default on your loan.
On the other hand, if you have a 520 mid-credit score, several 30 or 60 day late mortgage payments and cannot prove your income, you will have a higher interest rate because the lender believes there’s a higher risk that you will default on your loan—or at least not make your mortgage payments in a timely manner.
Your interest rate is a function of the “risk” you represent to a lender added to a base interest rate. You have control over most of the main risk factors. The better control you exercise, the better your interest rate will be. Mystery solved!
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