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How is a Borrower’s Mortgage Interest Rate Determined?

There are a number of things you should keep in mind when looking to apply for a mortgage. One of the most important is how much you will end up paying. The affordability of your mortgage will mainly depend on the interest you will have to pay. The interest you will be charged will depend on various factors. Lenders consider the following when coming up with a borrower’s interest rate.

The Borrower’s Risk
Risk is one of the factors that lenders put in mind when determining how much interest to charge. Even if you are applying for the same amount of mortgage as another borrower, you interest rate may be different from his/hers. This is because lenders assign different risk levels to all borrowers.

It is possible for borrowers to default paying the loans down the road, and lender know this. A borrower may be unable to pay his/her loan due to different reasons. The lenders can incur huge losses when borrowers fail to pay back the loans. This explains why lenders categorize borrowers in different risk groups when evaluating their mortgage applications. To determine a borrower’s level of risk, there are different factors that have to be considered. In general, borrowers that are considered high risk do not easily get approved for loans than low risk borrowers. When it comes to interest rates, low risk borrowers are charged lower rates than high risk borrowers.
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Credit Score
Lenders also consider a borrower’s credit history when coming up with the interest to charge. Your credit history can show your likelihood of paying back or defaulting the mortgage loan based on your past credit fulfillment obligations. If you are applying for your first credit, your credit history is likely to be zero. When you have a low credit score, this does not mean you are considered a defaulter. A poor credit score simply means there is no way of telling the likelihood of you paying back the loans since there is no history to refer to.
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To find out your credit score, request your credit report from one of the three national credit bureaus. Go through your report and check whether it has any errors before applying for a mortgage loan. Sometimes, you may have a poor credit score because of omissions or wrongful entries in the report. Get the report corrected before applying for a loan.

Down Payment Provided
Lenders will also consider the amount of down payment you would provide to determine how much interest to charge you. Making a large down payment means reducing the lender’s risk. As a result, the lender is likely to charge you a low interest rate.