Home interest rates have begun to start up from all time lows, maybe a foretaste of things to come, or maybe just a temporary thing. However, there are things that every potential home buyer or refinancer should know about how mortgage interest rates are determined.
A number of factors, including credit, income, assets and loan to value of the home being purchased or refinanced are all part of the equation. In today’s mortgage market, lenders don’t just reach into the bag and pull out a rate, the borrower will get what they qualify for.
For instance, if your current credit score is below 620, there are very few options available for a purchase or a refinance, although sometimes FHA or VA loans are available if your credit score is between 600-620 but doubtfully available below 600.
Above 620 to 680, most often FHA, USDA and VA loans will be the most economical way to proceed, because the cost of the interest rate will be quite a bit higher with a conventional loan. However, and here is where the loan to value comes in, FHA loans, no matter the loan to value, have mortgage insurance. That means that a conventional loan with 20% or more equity at a higher rate, could be less expensive than an FHA loan with a lower rate and mortgage insurance.
FHA, VA and USDA loans all have either upfront mortgage insurance (FHA) or a guarantee fee (USDA Guaranteed and VA) that can make a higher rate better in some circumstances. The VA guarantee fee varies for nothing for a veteran with a 10% or greater VA disability to 3.3% for subsequent usage for an regular duty vet.
To get the best conventional home interest rate today, you will probably need a credit score of 720-750. This is also true to get the best private mortgage insurance (PMI) rate. PMI can vary from one PMI company to another, make sure your lender checks the different companies and reviews the different programs, monthly, split and single pay to see which works better for you.
Closing costs might be able to be rolled into the loan on a refinance. Sometimes, it is also better to pay down the principal if it gets you to a better loan to value and from there to a better interest rate or mortgage insurance rate, or both.
Do your homework and be prepared to give your lender documentation, documentation, and more documentation. They really aren’t trying to find out more than they need to, in today’s mortgage market, it is all about proving what you say.
The process is more involved than it was a few years ago, but the quality of mortgages being made today is excellent. Also, mortgage loans are available for those with reasonably good credit, enough assets to buy and enough income to qualify for the payment.
About the author: Fred Chamberlin is a senior loan officer with Guild Mortgage Company in Oak Harbor. He has been in the mortgage origination business for over 20 years and in the lending business for over 30 and authors a number of mortgage related blogs.