The Three Largest Factors In Your Interest Rate
by David E. Brumbaugh
There are three major factors that affect how much you pay for a loan.
Understanding these factors can save you time, money and frustration.
1. The Federal Reserve Discount Interest Rate.
Banks and other lending institutions borrow money from the Federal Reserve
Banks. The discount rate is the interest rate a Federal Reserve Bank
charges eligible financial institutions to borrow funds on a short-term
basis. This rate is set by the boards of directors of the Federal Reserve
Banks. The discount rate has a direct effect on the “Prime Interest
Rate”, which is the interest rate on short-term loans that banks
charge their commercial customers with high credit ratings. You can get
live information on the current Prime Rate at www.FedPrimeRate.info.
Of the three major factors that affect your interest rate, this is the
one you have the least amount of control over.
2. Your FICO Score and Credit Report.
There are companies that gather and sell information about information
on where you work and live, how you pay your bills, and whether you've
been sued, arrested, or filed for bankruptcy. They are called Consumer
Reporting Agencies (CRAs). The most common type of CRA is the credit
bureau. Potential lenders will get your credit report from the credit
bureau.
The FICO score is a method of determining the likelihood that credit
users will pay their bills. It condenses a borrowers credit history into
a single number.
You can protect your FICO score and credit report by paying your bills
on time and not over-extending yourself. You also have the right to have
false information removed from your credit report.
3. Lender Business Factors.
Banks and other lenders are in business to make a profit. They also
exist in a competitive market. Like all businesses, they will balance
their profit margin with competitive factors. If they charge too little,
based on your credit history and the prime rate, they risk going out
of business. If they charge too much, they risk losing you to a competitor.
Therefore, in order to get the best deal you can, you should shop around.
Keep one thing in mind when you are shopping around. One of the things
that affects your FICO score is the number of times your credit report
has been accessed in a certain period of time. Therefore allowing too
many potential lenders to run your credit report in a short period of
time could be counterproductive. Three or four is typically a safe number.
If you request an on line quote from several lenders, they won't typically
run your credit report until after they have made their initial quote.
(You must explicitly provide a potential lender with permission to run
your credit report. For that, they usually need your Social Security
Number.)
In summary, the three major factors you pay for a loan are the prime
rate, your credit history (FICO score) and business conditions such as
competition. In order to get the best rate you can, you can do two things,
keep up a good credit history by paying your bills on time, and shopping
around for the best rate.
I would like to thank David Brumbaugh the owner and operator of EZandFree.com. EZandFree.com
provides consumers with online tools for easily obtaining free competitive
Mortgage and Loan Quotes. It also serves as a mechanism by which Mortgage
Brokers can obtain legitimate qualified leads from people who need their
services.
Other Factors that Affect Mortgage Rates!
Several other factors that can affect your mortgage
rate such as the amount of loan, the length of the loan, and whether
you use a fixed rate, adjustable rate, or interest only loan.
Mortgage rates
You can save thousand of dollars in
interest payments over the life of the loan, with a 20 year or 15
year loan, but your monthly payments will
be higher. An adjustable rate mortgage can give you a lower
interest rate than a fixed rate mortgage, but your payments could get
higher when the interest rate changes. interest only mortgages are loans
in which the borrower only pays the interest on the loan for a fixed
period of time, which can be anywhere
from 3-10 years. During this time, their monthly payments are significantly
lower than what it would be if they had a traditional mortgage because
they do not have to pay down the principal. That may sound good but
after the interest-only period expires, the borrower will then have
to start
paying on the principal plus remaining
interest, you will see a significant
increase in your monthly payments when the interest-only period ends.
If the market stops going up (or even worse, starts to go down), someone
with an interest-only loan can face a huge shortfall.
Can you afford that risk?
Down Payments
Putting down a bigger down payment will lower your monthly payment
as will paying for discount points up front. A larger down payment – greater
than 20% - will give you the best possible rate. If you choose a lower
down payment you will pay a higher rate as you are starting
with
less equity as collateral.
Closing Costs
You will also needs to consider your closing cost. Do
you want to roll them into the loan thus increasing your payments?
Or is it better to pay them up front? Always ask your bank or mortgage
broker what your lock in period will be. A mortgage lock in is a lender's
promise to hold a certain interest rate and points for you, usually
for a
specified
period of time, while your loan application is processed.
As David stated in the article above, Credit quality and debt-to-income-ratio
affect the terms of your loan through FICO Score. If you have good
credit
and
your monthly
income
far surpasses your monthly debt obligations, you will get approved
at a lower interest rate. However, if your monthly income barely covers
your minimum debt obligations, even if you have a credit report, you
will not receive the lowest available interest rate.
If you want to get an idea what different mortgage scenarios would
be please try out our Mortgage
Calculator. It will help you decide
what
type of interest and payments you can afford.
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