Debbie Shankar - 2 Mar, 2017

What Determines the Actual Interest Rate you Receive?

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Being able to go to settlement and get your dream home is a happy day. Perhaps you were glad to get the mortgage, and you did not feel that the interest rate mattered too much. You signed the papers, and now you are wondering if you could have gotten a better deal. Here are some reasons why you should check the interest rates before completing the deal.

Does a higher interest rate mean a higher cost?

Every loan, including home loans, is going to have an interest rate associated with it. This rate determines how much you will pay each month above the cost of the principal amount of the loan. The higher the rate, the more you will pay.

On a short-term loan, a slight difference in interest rates is not going to make that much of a difference. However, when you consider the effect over the length of a mortgage, a little difference in the interest rate could make a difference of tens of thousands of dollars!

What determines the actual rate you receive?

When it comes to the actual rate you are going to be offered, it will rarely be what you see advertised. This is because the advertised rate is likely going to be their best possible rate for people who have the highest credit scores.The actual rate you receive will depend on a couple of factors.

  • Locked in Interest Rates. The first is whether you locked in your rate or not. When you apply for a mortgage, you have the opportunity to pay for a locked in rate. In other words, the going rate for that day will be given to you if the mortgage process is completed within a specified time – usually 60 or 90 days. Some lenders will not charge for a rate lock.
  • Credit Scores. A second factor in the actual interest rate you receive will be based on your credit score. The lower your credit score, the higher your interest rate will be, and the smaller loan you will be able to get.
  • Lender Fees. Besides the personal factors that affect your interest rate, there may also be some additional fees, costs and charges. Some will come with any mortgage you get, but other fees may vary from one lender to another.
  • Lenders Mortgage Insurance. Having to get Lender’s Mortgage Insurance (LMI), if it is required, will also raise your Annual Percentage Rate (APR).

Can I get a lower interest rate?

The difference of a 0.5% in interest is equal to about $60 increased payment on a mortgage of about $200,000. Some people will choose to pay the equivalent of one point, about 1% of the loan, or $2,000 in this case, in order to get 1% lower interest rate. When paying $60 per month more for 30 years, it comes to more than $19,000 saved.

Another way to reduce the interest rate is to improve your credit score before applying for the mortgage. This cannot be done overnight. Things you need to do to raise it include: reducing your debt-to-income ratio to less than 20%, paying bills on time (most important), and checking to ensure that there are no mistakes recorded on your credit report.

A third way, which is a must, is to compare different lenders and see which one will give you the best deal. Be sure to compare services provided, too, and not just the interest rate.

The lower interest rate you get will mean a significant amount of savings over the term of a mortgage. It can make the difference between barely getting by each month, and actually being able to enjoy your new home. Or, you could even end up paying it off early and save even more money.

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