Learn how to qualify for better interest rates for your home mortgage
How Home Loans Work
A home loan, also known as a second mortgage, allows the owner to leverage the market value of their home to borrow money for any reason, ranging from debt consolidation to funding a home improvement project.
Economic Factors Affecting Mortgage Loan Rates
Wider economic factors that borrowers cannot control also affect mortgage loan rates. These include inflation, economic growth, and the state of the housing market.
Personal Financial Factors Affecting Your Loan Rates
Your financial situation also significantly affects the loan rate you will receive. Personal financial factors may include:
The Amount Owed on the Home
Home equity financing is the difference between your home’s value and your mortgage balance. The loan-to-value ratio (LTV) is a measurement comparing your mortgage amount to the value of your home. Generally, lenders prefer to see an LTV no greater than 80% based on your equity in the home. An 80% loan-to-value ratio means your equity in the home is 20%.
Credit History
Minimum credit scores required to qualify for a home loan vary among lenders, with many requiring a minimum credit score of 620. Lenders typically look at your FICO credit scores, which range from 300 to 850. A FICO score of 620 is considered “fair.”
Debt-to-Income Ratio
Lenders also consider your debt-to-income ratio when determining your home loan rate. Your debt-to-income ratio is calculated by adding your monthly debt payments and dividing that by your total monthly income. Total monthly income is the amount of money you earn before taxes and other deductions.
Repayment History
The repayment period for a home loan may affect the interest rate. Generally, a loan with a shorter duration (like five years) has a lower interest rate than a loan with a longer duration (like 15 years). A longer repayment period gives the borrower more time to default, thus the risk is higher for the lender.
How to Qualify for a Home Loan
You can take several steps to increase your chances of qualifying for a home loan. These include:
- Improve your credit scores: Raising your credit scores makes you a more attractive borrower. You can improve your credit scores by catching up on overdue payments on outstanding debt, reducing balances on your credit accounts, and refraining from applying for new credit while shopping for a home loan.
- Fix errors in your credit report: Inaccuracies in your credit report can affect your credit scores. Correcting these errors can remove negative marks.
- Increase your income: Increasing your income can help you qualify for lower rates on your home loan. You might, for example, consider taking on a second job to boost your income.
- Enhance your home’s value: Improvements and renovations can help increase your home’s appraised value. Updating your master bathroom or remodeling your kitchen are among the projects that can enhance your home’s value.
Conclusion
Some factors affecting the interest rate on your home loan may be beyond your control, such as the current economic environment. However, you can improve aspects of your finances that affect how much interest you will pay on your home loan. These factors include the amount of equity you have in your home, your credit history, and your credit scores.
Questions
Frequently Asked Questions (FAQs)
How can I find the best interest rates on a home mortgage loan?
To find the best interest rates on a home mortgage loan, compare the rates offered by several mortgage brokers, banks, credit unions, and online lenders. In other words, don’t automatically assume that your current mortgage lender has the best rates available.
How much can you borrow on a home mortgage loan?
In many cases, the lender will allow you to borrow up to 80% of the equity in your home. You can calculate your home equity by subtracting your mortgage balance from your home’s appraised value. The lender will use this number to determine your loan-to-value (LTV) ratio.
How many years do you have to repay a home mortgage loan?
The lender typically gives you anywhere from five to 30 years to repay a home mortgage loan. Generally, the monthly payments and interest rate of the loan are fixed. In some cases, the lender may impose a penalty for early repayment if you pay off the loan balance before the repayment period ends.
Sources
- Federal Trade Commission. “Home Mortgage Loans and Home Equity Lines of Credit.”
- MyFICO. “What is a credit score?”
- Consumer Financial Protection Bureau. “What is debt-to-income ratio?”
- MyFICO. “How does payment history affect your credit score?”
- Consumer Financial Protection Bureau. “Seven factors that affect your mortgage loan interest rate.”
- MyFICO. “How to improve your FICO scores.”
Source: https://www.thebalancemoney.com/how-your-finances-affect-your-home-equity-loan-interest-rate-5324315
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