Getting a home loan in Texas wasn’t always this hard. Before 2008, you could get a cheap home loan with minimal down payment even if you didn’t have the sufficient credit score to back it up. After the real estate crisis however, banks and private lenders started to scrutinize the minutest of variables, from your shopping history to your earning to debt ratio. Listed below are four such factors that you didn’t know affected your mortgage rate.
At first look, the entry may seem quite obvious. Of course, a higher loan amount will lead to a higher interest rate due to the added default risk. But here’s the kicker – an exceptionally small loan will also be subject to a higher interest rate.
The logic behind this is simple. Suppose you take out 2 loans, a $50,000 mortgage and a $5000 car loan. Assuming that the risk on both of them is the same, you will be paying a rate of 10% on each. For the lender, the 10% equates to a $5000 profit on the larger loan and just $500 on the smaller one. Since both of them have the same risk, he would obviously prefer giving out the larger loan. The added interest rate is to compensate the lender for the smaller profit margin.
The borrowing period will also affect how much you’ll be paying overall for the loan. The risk principle pops up here as well; a longer term period makes the loan more susceptible to numerous risks such as interest rate risk (chances of interest rates going up during the borrowing period. Since lenders will be taking on more risk, they will want to get a higher rate on the loan.
Let’s say you acquired a mortgage loan in 1996 at a fixed yearly interest of $500, which was substantial at the time. 20 years later, you’re still paying $500 per year, but does that amount hold the same value as it did in 1996. A higher inflation would mean that there’s a chance that the lender would not be getting the same monetary amount in today’s dollars. Thus, inflation is directly correlated with the mortgage rate.
You might have settled on an unbelievably low interest rate, but did you double check the fine print? Many people weren’t aware of adjustable rate loans until the 2008 real estate crisis, after which they became public enemy number one.
Basically, an adjustable rate mortgage offers lower interest rates at the start of the term, increasing midway through. While they may appear to be cheaper at first, the overall APR on these is higher than fixed rate loans. That’s not to say that they are a rip-off; if you’re expecting a higher income in the near future, adjustable rates can prove beneficial in providing you with some liquidity relief.
Keep these 4 factors in mind the next time you are applying for a home loan. Contact Todd Frank Home Loans in Plano, TX to talk with a dedicated expert about what you can do to qualify for the best home loans in Dallas, Denton, and Collin Counties. We serve all of Texas.