When purchasing real estate, a buyer will choose from several lenders. The main factor influencing the decision to purchase from a particular lender is the real estate loan rate, or interest rate. Ideally, a buyer wants the real estate loan rate to be as low as possible. Factors that affect the loan rate of a mortgage include credit scores or ratings, the collateral put up against the loan, the length of the loan, and the type of loan.
One of the foremost factors involved in determining a real estate loan rate is the credit score or rank of the buyer. Credit scores are established independently by credit ranking agencies, and a buyer will give a lender permission to access personal credit information in order to determine whether or not the buyer qualifies for a loan. Higher credit scores typically mean lower interest rates, although there are other factors that lenders will take into consideration before deciding to underwrite a loan.
Another factor that determines a real estate loan rate is the collateral a buyer can put forth to secure the loan. If a buyer has property like land or jewels or vehicles that are free and clear, the lender can obtain the rights to that property in the case of default. This makes the lender much more confident in the success of the loan, and the lender can therefore offer a lower interest rate.
The length of the loan is another factor in determining a real estate loan rate. A typical home mortgage term is 30 years, which leaves plenty of time for a buyer to default on a loan. If a buyer can reduce this amount to 15 or 20 years, however, this reduces the liability for the lender and the interest rate can be lower.
There are many different types of real estate loans, depending on the property being purchased and the creditworthiness of the buyer. Some loans are for commercial property and therefore have higher interest rates than residential property partly because they are not owner occupied. Some loans are insured by the government or a private mortgage insurance company, and therefore have lower interest rates. A buyer may even have the option of purchasing “points” on their loan, which decreases the interest rate as well.
A real estate loan rate is based upon a number of these factors which determine a lender’s overall risk when lending money. A lender wants the interest rate to be as high as possible in order to make the most money while still being competitive in the market. If a buyer shows any indication of the possibility of forfeiture of the loan, the lender must make the interest rate higher to balance the risk of default.