Thursday, July 3, 2008

Home Loan Rate : What Are The Variables That Affect The Rate

There are many factors that determine the home loan rate that you will be charged on a new or refinancing mortgage loan. Knowing and understanding how each of the variables affect the interest rate will help you to make the best choice of loan.

Type of loan

The type of loan that you select has a significant impact on the home loan rate. A variable rate loan may start out at a low rate and quickly escalate to a much higher rate. In fact, this is one of the major reasons why homeowners find themselves in trouble when they purchase a home with monthly payments that are at the limit of their personal affordability and then the payments increase because the interest rates increase. A fixed interest rate may cost slightly more than a variable loan to begin with, but you know what the rate will be in two years.


The economy of the nation has an impact on the home loan rate, particularly if the loan as a variable rate loan. Often the loan rate is tied to the prime interest rate plus a certain number of points. Of course, when the economy is slowing down, loans are somewhat harder to get and the qualifying process may be more stringent. When the economy is booming and loans are easy, more people can qualify to get a mortgage loan because the restrictions are less onerous. People are more willing to take a chance on a larger loan when they feel positive about the state of the economy.

Credit score

When applying for a new loan, the loan broker will almost always check the credit score before deciding what the home loan rate will be. The higher the credit score of the potential borrower, the better deal can be put together with the broker. Conversely, if the credit score is low or if there is little credit history, the loan is likely to cost more or require a higher percentage of the total as a cash down payment. Careful attention to making mortgage payments in full and on time will allow the borrower to create a new a better credit history so that a refinance later will have a better rate.

Loan Term

Theoretically a loan can be for any length of time, and this factor is one that many potential borrowers don't think about. They just assume the best home loan rate will be at a 30 year mortgage term. Even conventional loans can be taken for 15 years, 20 years or 25 years. Shorter term loans cost much less in interest over the term of the loan, so even at a higher monthly payment and the same interest rate, the shorter term loan is a better deal, with significantly less money paid in interest.

Balloon payment

Another common way to structure a mortgage loan that will affect the home loan rate is whether or not there is a balloon payment attached to the payment of the loan. Often a mortgage will be structured to run for two or three years with a very low interest rate at the end of which there is a balloon payment that is the balance of the loan. At the end of the initial period, often the rate will increase, or the monthly payment will jump. Sometimes the entire loan is refinanced at that point.

Learning about the variables that impact Home Loan Rates or Home Loan figures is simple when you access the great resource web site found at Check out the tips, links and cautions available here.

1 comment:

satinder said...

An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is

periodically adjusted based on a variety of indices.[1] Among the most common indices are the

rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and

the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an

index, rather than using other indices. This is done to ensure a steady margin for the lender,

whose own cost of funding will usually be related to the index. Consequently, payments made by

the borrower may change over time with the changing interest rate (alternatively, the term of

the loan may change). This is not to be confused with the graduated payment mortgage, which

offers changing payment amounts but a fixed interest rate. Other forms of mortgage loan include

the interest only mortgage, the fixed rate mortgage, the negative amortization mortgage, and the

balloon payment mortgage. Adjustable rates transfer part of the interest rate risk from the

lender to the borrower. They can be used where unpredictable interest rates make fixed rate

loans difficult to obtain. The borrower benefits if the interest rate falls and loses out if

interest rates rise.