What Determines Your Monthly Mortgage Payment?

How Your Mortgage Payment is Determined

Your mortgage payment and rate is determined by several factors:

• The first and most important is your credit score. Your credit report and score are a major consideration for lenders. When deciding whether to approve your loan application or to dismiss it outright, lenders will carefully scrutinize your financial history and stability. A credit report is useful for detailing your payment history on all loans, credit card balances, and other financial information. The credit report will provide you with a score, which is a numerical representation of your perceived creditworthiness. The better your credit score, or the higher your score, the less risky you appear to a lender. Having a good credit score will drastically improve your chances of qualifying for a mortgage loan with good rates.
• Discount points are the fees you are required to pay to your lender at the time of closing so you can lower your mortgage interest rate. Each point is equal to approximately one percent of your loan amount. For example, with a $100,000 loan, one discount point would be equivalent to $1000. There are pros and cons to purchasing points based on your own circumstances.
• Down payment amount. The ideal amount for a down payment is typically 20% of the purchase price of the home. However, for many people, especially first-time home buyers, coming up with this much cash is not possible. Because of this, lenders over the last couple of years have become increasingly willing to finance as much as 95% or even 97% of a home purchase. This means that only a 5% or 3% down payment is necessary. This, of course, will cause your monthly payment to be higher.

How Mortgage Rates are Set

Typical lenders of mortgage loans decide who gets approved for a loan, but they are not in charge of setting the loan rates offered. Rates are actually determined on the secondary market, where all mortgages are bought and sold. Two influential mortgage investors are Fannie Mae and Freddie Mac - set up by the government tens of years ago in an attempt to bring efficiency to the lending process. In addition to these two companies, other mortgage investors also buy loans that lenders make and will keep them in portfolio or combine them with other loans to create mortgage-backed securities. The loans will then be sold to Wall Street, mutual funds, and/or other financial investors, who will trade them again and again. These financial investors are the ones who determine the interest rate you receive on your mortgage loan. To get the best mortgage rate, you may want to begin to track rates daily from the time you decide that a home purchase may be in your future.

Find out what it all means to you.