Have you recently found yourself looking to make an investment toward the home of your dreams or purchasing a new car? Did you know that your lender doesn’t get to just determine the rate you pay? There are several factors that go into the interest rate that you see on the closing disclosure.

7 Factors that Determine Interest Rate

Credit Score
Higher scores will typically lead to a lower interest rate, while lower scores could give you a higher interest rate. Your credit score plays a significant role in the interest rate you pay, as your credit score is a number that rates your creditworthiness.

    Credit History
    Lenders will look at credit history to better understand your propensity to repay your debts. The less knowledge a lender has could mean that there is more inherit risk.

      Collateral Type
      Each type of collateral will hold its own rate sheet for lenders to follow. Purchasing a car could have a lower interest rate than purchasing a home, much like a residential piece of property will hold a lower interest rate than a commercial piece of property.

      Loan-to-Value (LTV)
      Your LTV is the percentage of your loan amount compared to the value of the property. Higher LTVs could increase the rate, while lower LTVs could have lower interest rates.

      Length of Term
      Shortening the term may allow you to pay down on the loan quicker and offer lower rates. Generally, shorter terms come with lower interest rates but higher monthly payments, while longer terms may have higher rates but more manageable payments.

      Adding a co-borrower could help when determining your rate. A lender will look at the credit scores of each applicant; depending on the bank’s protocols this could affect your rate.

      Debt-to-Income ratio
      Your DTI ratio is the percentage of debt compared to your income. Lenders will evaluate your DTI to ensure you can manage additional debt responsibly. A lower ratio often leads to a more competitive interest rate.

      Each financial institution may calculate their interest rates differently. Although there are many factors that go into calculating that shiny rate you see at the closing table, the ones listed above are some of the most common ones you may hear when speaking with your loan officer. At First Savings Bank, we are here to help turn your dreams into a reality with experts that are ready to help you every step of the way. Reach out to our team today by calling 1-833-372-4968 or stop by one of our convenient locations to gather more information.  

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