Email Post to a Friend: What Determines Your Interest Rate?

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Mortgage Interest Rates
You negotiated a good deal on your dream home with the beautiful kitchen, and you are approved for a mortgage. Now, all that's left is to sign the paperwork. All those pages you are signing detail what you will pay for the house you are making a home. One specific number to pay attention to is the interest rate, which of course, adds to the final amount you pay back.

So how is the interest rate calculated for people buying Chattanooga homes for sale? Here is a quick primer:

  1. Debt to income ratio
    This number shows lenders how much income you have to the amount of debt you are responsible for paying back. If you have a lot of debt payments already, you might find it difficult to pay a larger mortgage. One of the best things you can do before buying a house is pay down as much debt as possible. Not only will this let you get a better interest rate, but it will also give you breathing room as you begin homeownership.

  2. Credit score
    Another number related to debt to income ratio is your credit score. This shows a conglomeration of how you have handled debt in the past. It looks at how many credit lines you have successfully repaid, how often you paid late, and how much you currently owe. Again, working to raise your credit score before you apply for a loan will help you get approved easier as well as get a better interest rate.

  3. Type of loan
    The inner workings of your loan also affect the interest rate. Loans come in different forms. Adjustable rate loans may start lower than fixed-rate loans but have the potential to rise as the market changes. Additionally, FHA loans come with higher rates because they are traditionally taken out by people who have lower credit scores. Other types of mortgage loans include USDA loans and VA loans. Talk with your lender about each kind and what they mean to the rate of interest you pay.

  4. Down payment
    The amount of your down payment influences your interest rate. Not only does this give you equity in the home right from the beginning, but also paints you as a responsible money handler, and can lower your interest rate.

  5. Type and location
    Another factor in your interest rate is the type of house of you are buying and its location. Townhouses get different rates than 4-bedroom suburban homes, and rural homes are treated differently than urban homes. The state you live in can affect your interest rate as well. Finally, if a house needs a good bit of work, the interest rate could be higher.

  6. Current events
    As if all those things aren't enough to keep up with, there is one factor you have no control over--how current events influence interest rates. What is happening in the country and in the world makes a difference as to what you pay. When the Federal Reserve changes interest rates, you see the change at your bank, so paying attention to such trends may help figure out when to buy a home.

The Consumer Finance Protection Bureau has several helpful tools on its website for you to use when considering a mortgage. 

Our REALTORS® are also happy to explain some of the ins and outs of interest rates and mortgage loans. Contact us, and we will answer all your questions so you will be fully prepared to buy that house with the beautiful kitchen.