Unless you are an entrepreneur on the quest of scaling up your business, home loans will probably be the most significant financial commitments you make in your life. With home loan tenures ranging from 15 to 30 years, a slight difference in interest rates can make a big difference.
Your mortgage rates are like the time you see on digital clocks. Even though you just see a number, several calculations go behind it. However, in a clock, the parameters for calculating time are consistent, whereas, in the case of your mortgage rates, it changes.
If you are a soon-to-be-homeowner, the chances are high that the uncertainty of factors determining your mortgage interest rate haunts you. To ease your worry, let’s look at the major factors that affect your loan against property interest rate.
Major Factors that affect your loan against property interest rate
1. Credit Score
As you would have expected credit score is a primary factor that determines your mortgage loan rates. Generally, applicants having higher credit scores receive the lowest interest rates. Lenders or banks use credit scores to determine how reliable you will be in repaying the loan amount. As lower credit scores depict higher risks, the interest rates are higher as well.
2. Down Payment
In case your credit score isn’t impressive, lenders or banks will advise you to make a hefty sum of down payment to lower the interest rate. The drop in interest rates is primarily because a larger down payment reduces the lender’s level of risks as you are investing more into the property.
3. Loan Amount
Generally, a higher amount of loan attracts higher interest rates due to the increase in the level of risk. However, if you offer a considerable sum as down payment, there will be a significant reduction in loan against property interest rate.
4. Type Of Interest Rate
Mortgage loans can avail three types of interest rate - floating, fixed and mixed interest rate. As the name suggests floating interest rate changes during the tenure of the loan, whereas the fixed interest rate stays the same. In the case of mixed interest rate, both fixed and floating rates are applied at specific periods of the loan tenure.
Generally, lenders impose higher interest on fixed and mixed options to make up for the losses in the interest income they might face.
5. Loan To Value Ratio
The Loan To Value ratio or LTV measures the loan amount with respect to your house’s value. If you pay 20% of the total amount as down payment, then your LTV ratio is 80%. If your LTV ratio is above 80%, then the mortgage loan interest rate will be higher.
6. Your Job
An applicant with a steady source of income will receive lower rates of interest. This is because being self-employed increases the level of risks for the lender.
As you can see, mortgage interest rates are determined by a number of factors. Along with the mentioned ones, loan interest rates can significantly vary depending on the lender or bank you choose to associate with. Discuss with several trusted loan providers and choose the one which best suits your needs.
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