What's in Your Rate?

In our previous post, we shared some of the frequently asked questions to a lender. One of those questions was “what’s your rate?” And the answer was “it depends.” That’s not the answer most people want to hear, but it’s true. There are approximately 26 different factors that goes into quoting rates. We'll share 13 today and the other 13 in tomorrow's blog.

1. Loan Size – how much money are you asking for? Often if you are requesting an amount under a certain level (i.e. $100,000), there may be a slight increase in rate.

2. Loan-to-Value (LTV) – what percentage is your loan amount to the value of the property? Typically, the lower the percent, the lower the rate.

3. Combined Loan-to-Value (CLTV) – this ratio includes not only the current loan you are wanting, but any additional loans on the property, such as a home equity.

4. Credit Score – the higher the credit score, the lower the rate.

5. Credit History – the less credit history you have, the less knowledge a lender has of your repayment ability, possibly making you slightly more risky. The better the payment history, the better the rate.

6. Escrow Preference – some lenders require escrows, or money put aside to pay for things such as taxes, insurance, etc. If you choose not to escrow, you may be penalized by having a higher rate.

7. Closing Date – it is important to lock in on a rate that is as close to your closing date as possible. The longer the rate lock period, the higher the rate will be.

8. Loan Type – fixed, variable, balloon – these all have varying rates because of the variation of risks.

9. Property Type – a residential house will have a lower interest rate than a commercial farm on 50 acres.

10. Occupancy Type – typically rental or investment properties have higher interest rates.

11. Residency – rates will be lower if you plan to live in the house full-time versus using it as a second home.

12. Available Assets – what additional assets do you have as possible collateral? The more down payment you have, usually the lower the rate.

13. Asset Seasoning – how long have you had your assets? There may be restrictions for assets owned under a certain timeframe that could affect the rate.

You don't have to remember all of these, but if your lender is quoting you a rate without asking some of these questions, be sure to ask them what criteria they are using to factor your rate.

Check back tomorrow for the other 13 factors that affect your rate.