Risk-based pricing– the risk associated with lending the money to the borrower is generally the key determinant of the amount of interest that will be incurred. The greater the risk associated with lending money to a certain borrower the more the interest rates to be charged are high. Similarly, those who have a low risk associated with lending money to them tend to be credited with lower interest rates. Some of the factors that determine your risks are
- Your credit scores– credit scores are based on the information found in the credit score reports. People who tend to pay their bills on time and have low credit balances tend to have a high credit score. People who have a tendency of delayed of delayed payments or skip payment all together tend to have a lower credit score. Lenders tend to use the credit score for risk analysis. A borrower with a good credit score is viewed as a lower risk compared to one with a lower credit score. It is therefore important to maintain a good credit score because it will have an influence on your mortgage interest rates.
- The size of your down payment- the amount you are willing to put down on a loan also to a greater extent influences the risk you bear. Making a large down payment on the loan results to a lower loan to value ratio which in turn reduces the value of risk to the lender. A lower down payment results to a higher loan to value ratio which in turn increases the risk value to the lender. Having a low risk value earns one lower interest rates as opposed to a high risk value.
- The type of home that you are buying- different properties have different risk levels associated with them. Properties purchased as primary residence home tend to have a lower risk associated to them as opposed to secondary homes or vacation houses. This is because primary shelters are a necessity and one would not risk not paying the mortgage because it would leave them displaced. On the other hand vacation homes can be easily abandoned since they are not a basic necessity.
- The amounts of money you are borrowing- larger loans are associated with a higher risk as opposed to smaller ones. Borrowers who use confirming loans often qualify for small loans as opposed to those who use jumbo loans. Over the last years there has been a change in trends because those using jumbo loans have lower rates on average compared to those who use confirming loans.
- Whether or not you pay points at closing- paying for points at closing ensures that you secure lower interest rates as opposed to when you do not pay for points at closing. Each point you pay for accounts for a reduced percentage in your interest rates, paying for points helps guarantee lower interest rates over a long period of time.