Here at Harbor Mortgage Company, we understand that getting your first mortgage is a big step, and we want to help you prepare for it. In our experience, many first-time home buyers don’t have a firm understanding of exactly how mortgage rates are calculated, so we have put together this article to explain what factors are used in those calculations.
- Credit Score. One thing that will affect the mortgage rates that you are offered is your credit score, as this score is a reflection of how much debt you have and of your ability to pay them off on time. The higher your credit score is, the lower your mortgage rate will be.
- Loan-to-Value Ratio. Another factor that mortgage lenders consider when determining your rate is the loan-to-value ratio, or how much you are borrowing relative to the total cost of the property. For example, if you make a $20,000 down payment toward a $100,000 house, you will need to borrow the remaining $80,000, and your loan-to-value ratio will be 80%. In general, if your ratio is higher than that (meaning that your loan is greater than 80% of the total value of the property), your mortgage rate will be higher, as the loan represents a greater risk to the lender.
- Outside Economic Factors. The calculations for mortgage rates also have to factor in many things that are outside your control, such as the state of the overall economy, the level of inflation, prevailing interest rates, and job growth. All these things also play a role in how much financial risk a lender is willing to take on, and finding a good rate can be easier or harder depending on these external factors.