June 10, 2020
Have you ever started to research home loans and found yourself getting confused at all the data presented to you? What is the difference between a 30-year fixed rate conventional home loan and a 30-year fixed rate FHA mortgage? How do you know which loan to choose?
Buying a home is one of the biggest commitments you can make financially as an ordinary, non-business borrower.
The down payment alone makes some borrowers worry they can’t afford the loan (fortunately there may be local down payment assistance programs in your area that can help) or that they won’t be able to understand the intricacies of a mortgage.
But buying a home involves a lot more common sense than you might realize. One area this is true for is interest rates–once you understand how they work and why, the entire process is less intimidating (at least where the rates are concerned).
How Home Loan Interest Rates Work
Home loan interest rates are not standardized for all lenders–the market rate isn’t always what an individual financial institution will offer. The rates that are offered to you are based your credit score, whether the borrower chooses to lower the interest rate by purchasing discount points, The lender’s policies, the timing of the loan, and more
FHA home loans advertised at lower interest rates than conventional loans–do you know why?
Risk Versus Reward
Take a look at websites displaying the current mortgage loan rates, you’ll see a difference between a 30-year fixed-rate conventional mortgage and a 30-year fixed-rate FHA loan.
The rates listed on these websites tend to assume a highly qualified borrower, but you may be offered a higher, but still-competitive interest rate if your credit scores and on-time payment record is acceptable to the lender.
Comparing rates is a very good thing to do when shopping around for a lender but knowing why government-backed loans such as FHA mortgages, USDA loans and VA loans have lower rates is an important factor.
Conventional mortgages often have higher interest rates and often require 20% down in order to avoid paying private mortgage insurance premiums.
FHA loans have mortgage insurance requirements, too. But FHA mortgages are partially guaranteed by the government, reducing the risk to the lender when issuing the loan. The government promises a portion of the loan will be repaid should the borrower go into default and foreclosure.
You Can Prepare For Your Loan To Improve Your Chances For Approval
What do you need to know about home loan interest rates? The amount of risk your lender will take issuing you the loan is an important part in how much your home loan will cost over time.
That is why your credit report is so important. It’s the only unit of measure your lender has to determine how much potential risk is involved in issuing you the mortgage.
Are you a good risk or a bad risk? That’s what the lender must determine before approving your mortgage. It’s also something you can take steps to work on in the year leading up to your loan application (or longer if you have the time).
It’s a very good idea to explore credit monitoring and pay much more attention to your credit report as soon as you know you are committing to a mortgage loan. This will help you become more of a good credit risk in the lender’s eyes and get you closer to home loan approval when the time is right.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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