Five Interest Rate Terms to Know
When Buying a Home
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Congratulations! You’re ready to buy your first home. As you shop for a mortgage, you’ll
come across the term “interest rates.” While you may have a basic understanding of interest
— money lenders charge in exchange for allowing you to use their funds to make a
purchase — mortgage interest rates can be complex and confusing.
“Many factors go into determining the interest rate your lender will offer you,” says Jason
Langston, Director of Customer Experience and Marketing for Vanderbilt Mortgage and
Finance, Inc. “By understanding the factors that influence your interest rate, you can obtain
the best possible mortgage plan and get into the home of your dreams quicker.”
A variety of factors determine your interest rate, including:
Down payment: Your down payment reduces the amount you will
owe on your home, and shows your lender your capability to manage
funds. Most lenders like to see 10-20 percent of your home’s cost as a
down payment.
Collateral: This is the property you pledge as security for the loan.
Lenders ask for this to protect themselves in case a borrower defaults on the
loan. Either the home itself or the home and land together can be collateral
for a loan on a manufactured home.
Loan amount: The amount you need to borrow is calculated by the
purchase price, minus your down payment, plus any other costs that will be
covered by the loan including closing costs and third-party fees.
Credit score: Lenders will review credit scores for everyone listed on
the mortgage application. Generally, the better your credit score is, the
more likely it is that you may qualify for a more favorable interest rate. A
good credit score can help you negotiate the loan terms with your lender.
Origination cost: This is the amount the lender charges to process
your loan application, which includes gathering and reviewing all loan
application documents, underwriting and closing your home loan.
Use a monthly mortgage payment calculator to estimate just how much your
mortgage payment will be each month.