For most borrowers, a mortgage will be the most significant loan they will ever take out. Plus, it is a long-time commitment. Saving money while paying your mortgage is the goal here. And even the slightest difference in mortgage interest rate can equal significant savings in the life of your loan.
But how do you get a lower interest rate? How will you determine if you qualify for a lower interest rate? The following factors affect your mortgage interest rate and maybe your mortgage solutions.
Factors that Affect your Mortgage Interest Rate
Credit Score
A credit score is a three-digit number that determines your creditworthiness. It will determine if you are a high or low-risk borrower. The less credit history you have, the harder it will be for the lender to assess your risk. That is why they give borrowers with short credit histories higher interest rates.
According to Equifax, credit scores of 300-579 are considered poor. 580-739 is Fair. 670-739 is good. 740-799 is very good. Above 800 is considered excellent.
Debt-to-income Ratio
The debt-to-income ratio or DTI ratio determines how your monthly debt payment is compared to your monthly income. Borrowers with low DTI ratios are less likely to default on their debt payments. If you think that you have a high DTI ratio (above 43%), you may want to lower it by:
Reducing other debts. Paying off debts that are manageable to pay now to reduce your DTI ratio. You can also increase your income. Sometimes, non-traditional source of income like alimony or trust income is considered.
Just make sure to ask your lender about the availability of mortgage products that include them.
Keeping your DTI ratio low can help you qualify for a home loan and can give you more other opportunities.
Loan-to-value (LTV)
Loan-to-value or LTV will determine how much you borrow compared to the cost of the home. It will also determine if your lender will require you to get mortgage insurance. Mortgage insurance protects the lenders in case you default on mortgage payments.
If you have a high LTV, you are most likely viewed as a high-risk borrower. LTV affects your chance of getting approved for a loan and the interest rates you are offered. Aiming for 8-% or fewer will increase your chance of getting loans with favorable interest rates.
Location and Type of Home
The interest rates offered to you may vary from state to state, between rural and urban areas. The location and the type of home also affect the mortgage interest rates.
For instance, a single-family home will have a lower interest rate than a beach vacation home.
Regardless of your location, it is essential to talk to multiple lenders before deciding and settling. Different lending institutions can offer different interest rates.
Mortgage Loan Term
The mortgage loan term determines how long you will pay your mortgage. It can be 15 years or 30 years, it can also be other terms, it depends on you.
Shorter terms have lower interest rates and lower total costs but higher monthly mortgage payments. The longer term is vice versa.
Mortgage Loan Interest Rate
There are two mortgage interest rates you can choose from when applying for a mortgage. Variable rate and Fixed rate.
Variable rates tend to fluctuate with the market. It also has a lower interest rate than a fixed rate because it is riskier for borrowers.
The fixed rate has a higher interest rate than the variable rate, but your interest rate stays the same for as long as your mortgage. Unless you renew your mortgage, that’s when it can change.
Getting the best rate in Canada will be easy with the help of your mortgage broker or lender.
Co-borrower
If you know you don’t have a good credit score, a co-borrower might help you get lower interest rates. The credits your co-borrower will be considered by your mortgage lender. Saving even a small percentage in your interest rate can equal significant savings over the life of your loan.
Down Payment
Down payment is the cash you pay upfront when you apply for a mortgage, which is deducted from the purchasing price of the home and the total amount you borrow.
Larger down payment, lower interest rates. A 20% down payment is advisable. Lenders will see you as low-risk if you do.
If you pay lower than 20% for your down payment, your lender may require you to get mortgage insurance which protects them in case of default.
A larger down payment also means lower overall costs.
Conclusion:
Patience in shopping for lenders is a must if you want a lower interest rate. It is not easy to find a common interest now because of the continuous rising of interest rates. But if you have an excellent record, you’ll have the right to negotiate lower interest rates.
A mortgage may be the most significant loan you will ever apply for, and it is a long-time commitment. Finding a low-interest rate will take a lot of work; that’s okay, rather than paying more money on your mortgage.
Saving money while getting the home of dreams is the primary goal. You have to do everything to save money. As mentioned earlier, a slight difference in your interest rates can equal significant savings in the long run.
There are many best mortgage lenders you can find in Canada, and one can be found here at Private Mortgage Canada. Send us a message, and we’ll help you with your mortgage.
