Understanding Mortgage Rates

Let's Get Real About Rates.

Mortgage rates refer to the interest you pay on your home loan. It’s the cost your lender charges you for borrowing the money, just like the interest rate on a car loan or credit cards. When it comes to home loans, mortgage rates are a little more complicated because the loan amounts are so much higher and interest rates don’t come in one size fits all (no matter what you may see advertised).

Use APR Rates for Comparison
To begin with, when you see a mortgage rate it’s always followed by “APR,” the annual percentage rate. The APR includes not only the interest expense (the percentage that the lender charges for lending you money) but also all fees and other costs involved in getting the loan, such as origination charges, discount points and any other costs. Those fees add to the cost of the loan, and APR takes them into account. That’s why APR is higher than the interest rate and is a better representation of the actual cost of the loan. When comparing loan estimates, always be sure to compare APR figures.

How Mortgage Rates are Calculated
When it comes to determining your mortgage rate, keep in mind that you can control some components, while others are influenced by current economic conditions, government regulations and other private investments that are all part of the larger U.S. economy. As you might guess, that means mortgage rates move up and down daily, based on the current and expected rates of inflation, unemployment and other economic indicators. However, you have some control over several key factors your lender will take into consideration to determine the interest rate on your loan.

Your Credit Score
Your credit score is determined by looking at all your credit files to see how credit-worthy you are. This includes your outstanding loans, credit cards and the payment history on each of them. Your actual score is determined by analyzing a combination of your payment history on each account, how much you owe, how long you’ve had credit, if you’ve had any recent credit inquiries, and the types of credit you have. The higher your credit score, the more likely you are to get a lower mortgage rate.

Your LTV (Loan-To-Value Ratio)
The loan-to-value ratio measures the mortgage amount compared with the home’s price or value. For instance, suppose you buy a house for $200,000, put $40,000 down and get a $160,000 mortgage, your loan-to-value ratio is 80%. Loan-to-value ratios that are greater than 80% are typically considered high, creating greater risk for the lender. This may result in a higher mortgage rate for the borrower.

The Loan You Choose
PrimeLending can offer you many different types of loans, including conventional and government-back FHA, VA and USDA loans. They all offer different rate scenarios dependent upon their specific program details and the size of your down payment.

Customized Approach for Accuracy
All of these variables are why some lenders don't advertise rates on their website – they don’t want to trick you. Others advertise rates hoping you race to them for business, only to be surprised when the rate is higher than you originally thought. The best way to get an accurate rate is to combine all components that go into a mortgage rate.

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