If you are shopping for a mortgage, you of course want the best possible rate. This is a decision that you will live with for many years. How do the banks determine the rate they quote you in the first place?
If you understand how rates are fixed, you will be able to understand which factors that are out of your control, and which you can do something about.
The single item that has the most influence on the level of the interest rate is the credit rank of the borrower. If you have heard discussions, or seen constant ads on the internet about your “FICO” score, you may now what the discussion is about.
A FICO score is a rating that credit agencies such as Equifax put on any person who requests credit. If you have high income, with a good job history, and have never had any problems paying back any loans, you will have a high FICO score.
An important consideration also is the size of the down payment on the home.
The larger the deposit, the less exposure the lender has. In addition, the more you are willing to put down indicates to the bank that you are going to be just as committed to this property as they are.
This means that the lender can consider you a better risk and will lower your home loan rate. The problems most home buyers have, however, is deciding between saving the deposit and continuing to pay rent. The longer you pay rent, the longer you can wait and save the money for the down payment, but couldn’t rent money just as well be a mortgage payment?
The next thing that will be used to determine the rate is the length of the mortgage. If a bank has to commit for an extended length of time at a fixed rate, they will want to protect themselves by fixing the rate higher.
Taking a shorter maturity on your mortgage, such as a five year loan instead of a 25 year traditional loan will result in a lower rate for you. The downside to this concept is that, if rates are on the rise, you will have to pay more each time you renew your short term mortgage, instead of having a steady rate for 25 years.
Economics is another factor that influences interest rates. If interest rates are going up across the board, interest rates on mortgages will go up as well, since banks have to pay interest on the money they obtain. These market rates are set according to complex economic indicators.
But despite the fact that rates can decrease, most people prefer not to take a risk and would rather fix a loan rate for a longer period, then to be constantly exposed to increased rates on short term loans.
A final factor is the size of your mortgage. Banks are limited as to the size of their loan portfolio, and if your mortgage is sizeable, they will be adding a lot of risk to their portfolio and will expect a higher return for that higher risk.
Find out what is the lowest rate for you with calgary mortgage rate or find more about experienced alberta mortgage brokers
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