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Home Ownership Preparation :: Mortgage Rate Calculators
Mortgage Rate Calculators:
How Mortgage Calculators Figure Out Your Interest Rate
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Mortgage rate calculators are certainly appealing – just punch in a few numbers and they come back with an estimate of your expected mortgage interest rate.
The key word here is estimate because it’s exactly that.
Unfortunately, online mortgage rate calculators won’t be able to give you a completely accurate figure for your expected mortgage rate.
But, they can give you an educated guess based on your ability to answer or provide the following factors:
Income
Most mortgage rate calculators will ask for your annual gross income (and your spouse’s if applicable) as a starting point for understanding how much you can afford as well as how your desired mortgage will affect your debt to income ratio.
Typically, a higher debt to income ratio translates to a higher mortgage interest rate.
Down Payment
The amount of your down payment will directly affect your mortgage interest rate. You see, there’s a big difference between providing a 20% down payment and a 0% down payment. Why?
Because the couple with a 20% down payment investment in their home is significantly less likely to default on their payments than someone with little to no actual equity in the property. They’re also not required to pay private mortgage insurance.
Usually, down payments affect mortgage interest rates in the following increments – 0%, 3%, 5%, 10%, 15% and 20%. For the best rate possible, a 20% down payment is needed at most lenders.
Term Length
Another important factor for mortgage rate calculators is your term length. For example, a 15-year mortgage may have a different rate than a 30-year mortgage.
Type of Mortgage
The type of mortgage will also affect your estimated interest rate. For example, an ARM (adjustable rate mortgage) typically offers low interest rates, particularly at the beginning while a fixed rate mortgage offers stability, but charges higher interest rates.
A mortgage rate calculator is unable to estimate your expected mortgage interest rate without first knowing what type of mortgage you’re looking for. Some calculators will, however, compare different types of mortgages for you.
Total Amount Borrowed
The total amount borrowed is another factor that can affect how a mortgage interest rate calculator calculates your estimated interest rate.
Why? Because this is the other half to your debt to income ratio. A bigger mortgage means a bigger ratio and a bigger ratio means a higher interest rate.
Estimated Credit Score
This is where mortgage rate estimates tend to get bogged down. Most online mortgage rate calculators ask you to provide an approximation of your credit rating (fair, good, excellent, etc).
The problem is most people don’t even know their credit score and tend to provide unintentionally inaccurate information in this spot.
See also:
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Home-Ownership-Preparation.com :: Mortgage Rate Calculators