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Buying a home is easily one of the most expensive purchases most people will ever make. However, it is incredibly uncommon for someone to have the entire cost of purchasing a home saved in advance – especially if they are a first-time home buyer. So, most people turn to mortgage lenders to finance the remainder of their purchase beyond their initial down payment.
However, borrowing money comes at a cost. In order for lenders to be able to afford the loans they issue for people’s mortgages; they need to be able to make money off of it. That is why lenders will charge interest as a part of the borrower’s loan repayment.
Much like how there are a wide variety of lenders, there are multiple types of interest rates and factors that help determine the amount an individual will pay on top of their principal – the initial value of the mortgage loan. So, let’s take a look at the different types of interest rates and the factors that go into determining which rates are available to different home buyers and investors.
If you would rather get straight to work and start applying for the best interest rates for your investments, click the link below for a free strategy call today.
Determining Credit Worthiness and Risk
Before a lender will issue an approval or pre-approval for a mortgage loan at any interest rate, they must first determine which interest rates the prospective buyer will qualify for by assessing the credit worthiness of the client and factoring in the level of risk that goes into issuing the loan. This is done by assessing various factors of the individual’s financial history and current circumstances.
One of the key factors when determining the credit worthiness of a prospective buyer is the individual’s debt-to-income (DTI) ratios. This ratio is determined by weighing a person’s debts and regular payments (credit card debt, car payments, insurance payments, etc.), against their gross monthly income. This is to ensure that the buyer is not living beyond their own means and will be able to afford their monthly mortgage payments.
If someone applies for a mortgage with a high DTI ratio, they would be considered higher risk and as a result would typically qualify for a higher interest rate. Likewise, clients with a low DTI would qualify for lower overall rates.
As well, the level of perceived risk involved with a mortgage loan is also tied to the size of the down payment being put down for the home. Lenders typically offer lower-rate mortgage products to individuals whose loans have a lower loan-to-value ratio (LTV).
Your LTV is the ratio between the size of the loan provided by the lender and the appraised value of the property. Therefore, by offering more money on your initial down payment, you may be able to qualify for mortgage products with a lower interest rate than you would have otherwise received.
A fixed-rate mortgage is a mortgage loan with a single fixed interest rate that is locked in for the lifetime of the loan. This also means that the monthly mortgage payments and the amortization period will not change for the entire repayment period.
The interest rates on these loans are often higher than their variable counterparts but have the advantage of never increasing in the event of a rate hike.
Fixed-rate mortgages are an excellent option for someone who likes to budget ahead due to the consistent payments for the entirety of the loan.
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Unlike a fixed-rate mortgage, a mortgage with a variable rate does not have a set interest rate for the entirety of the repayment period. Instead, a variable-rate mortgage allows you to start at a lower initial interest rate. However, as the prime rate is adjusted, your loan is recalculated, and your payments may change accordingly as your lender recalculates your interest rate.
However, instead of charging more or less money each month following a rate adjustment, lenders will typically put more or less of your monthly payments towards your loan principal. This results in either a shorter or longer estimated amortization period.
Loans with variable rates are often very attractive to people who are planning to stay in a home for a shorter period of time as they are likely to sell their homes before the rate ever rises above a comparable fixed-rate mortgage.
This option is much more uncommon than the previously listed choices. Typically used for wealthier buyers or investors with less predictable incomes. These loans give you the ability to strictly pay the interest for the first few years of the repayment period, resulting in significantly lower monthly payments. This is ideal if you plan to own the home for a very short period of time and intend to buy something bigger later.
However, an interest only loan prevents you from building any equity in the home during the interest free period. As well, if the value of the property declines, when it comes time to sell you may find yourself owing more money than your home was worth when you purchased it.
Getting the Best Interest Rates Available
With such a massive variety of lenders and mortgage products available, it can seem daunting as a buyer or new investor to try and find the best interest rates for your specific circumstances and investment strategies. Fortunately, by going to a mortgage broker, you can simplify the process dramatically.
For example, here at LendCity, we work with a network of thirty-five experienced lenders to help you get the lowest interest rates available to you to maximize your satisfaction and comfort. By working with us, your finances will be analyzed carefully to help you secure the best interest rates from one of the top lenders.
So, if you are ready to get started today, or would like some more information, you can give us a call at 519-960-0370 or visit us online at LendCity.ca. From there a member of our team will gladly work with you to ensure your mortgage experience is as stress-free and relaxing as possible. Alternatively, click the link below to book a free strategy call with our team at LendCity Mortgages today.