Mortgage Rates and Risk

 

Mortgage rates are determined by risk. The more risk, the higher the rate.

 

Think of it this way. Say you have two friends who both want to borrow $100. One of your friends is very reliable. The other, well, not so reliable, and actually has a history of being behind on his bills. Who would you lend money too?

 

Now, think of this from a bank's point of view. If a customer plans to make a home purchase and has 10% to spend as downpayment, as well as good credit, they are likely to receive preferred financing rates. The same customer, with no downpayment, is going to receive a higher interest rate from a lender. Basically, the individual who put 10% down has more to lose if they walk away from the house, making them a lower risk investment.

 

The higher the risk - the higher the rate. Some risk factors to consider:

 

• Bad Credit means you are less likely to pay bills on time, which is a risk.
  
  
• Lower Down Payment means you have less to lose if you walk away from the home.
  
  
• Investment properties are less secure than primary residences. If you get in financial trouble, you are more likely to let your investment property go before your primary home.
  
  
• A higher debt ratio means you have less money to pay your bills, so it's higher risk.
  
  
• Loan Amount - the larger your loan is, the higher the rate. This normally starts to apply once rates go above the conforming loan limit into a jumbo mortgage.
  
  
• Longer Term locks are a higher risk. Normally rates are locked for 30 days. For each 15 days longer than 30, the rate goes up about 1/8th of a percent (.125%). Once you get beyond 60 days, most lenders ask for a non-refundable deposit up front to lock the rate. Why? The longer the rate lock, the more risk is involved prior to closing.