An interest rate is the amount charged for the use of money. Most credit has an assigned interest rate based on the length of the loan. There are several factors in determining the interest rate for a mortgage loan:
- The loan amount – the more the loan amount the more of a break you get when considering the interest rate.
- Credit Score – this is a large factor in determining the interest rate. The higher your score, the better the rate
- Loan to Value – LTV is basically the amount of your loan compared to the value of your home. If your home is worth 100,000, and you are borrowing 80,000 – your LTV is 80%. The lower the LTV, the better your interest rate will be.
- Mortgage Term – This is the length of the mortgage. Mortgage loans are given for 30-years most commonly. The lower the term - the lower the rate.
- Property Type – Your primary residence will always have a lower rate than an investment property.
APR – Annual Percentage Rate is a rate that is used to compare the finance charges on your mortgage. It is NOT the rate your payment is based on. This rate includes your PMI (private mortgage insurance), upfront fees associated with government loans, and some closing costs. The note rate (the rate your payment is based on) will never be the same as the APR. The APR is the number to compare one lender to another.