The Ultimate Guide to Loans

Three Things Lenders Consider to Determine a Borrower’s Interest Rate

There are a number of things you should keep in mind when looking to apply for a mortgage. Among the things to consider is the amount you will pay. The interest you will have to pay will greatly determine the affordability of your mortgage. Lenders charge interest based on a number of things. Here are three things that will affect your interest.

How Risky is It to Lend Money to You
How risky you are as a borrower will determine the interest you will be charged. You will not be charged the same interest as another borrower, even if you are applying for the same amount of mortgage. This is because the borrowers have different levels of “risk” according to the lender.

Over time, some borrowers may be unable to pay back their mortgage loans. A borrower may be unable to pay his/her loan due to different reasons. When loans are not paid back, the lenders can undergo huge losses. This explains why borrowers have to determine the level of risk that a borrower possess before he/she can be approved for a mortgage. There are a number of factors that are considered to determine the risk level. 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
Another factor that lenders consider when determining the interest to charge borrowers is credit score. The credit score is a measure of how likely you are to fulfil your obligations to pay back the loan based on fulfillment of your past obligations. You are likely to have a poor credit score if you have not been approved for credit in the past. When you have a low credit score, this does not mean you are considered a defaulter. Instead, it means that you have not established a history of paying back and hence there is no way of telling whether or not you will honor your obligations.
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To find out your credit score, request your credit report from one of the three national credit bureaus. Check your credit report for 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.

How Much Down Payment Will You Provide?
Lenders will also consider the amount of down payment you would provide to determine how much interest to charge you. When you make a large down payment, you are in effect lowering the lender’s risk. This means you will be rewarded with low interest.